x Abu Dhabi, UAEThursday 18 January 2018

Sharper profits for steel makers

A rise in steel prices this year pushed by demand from China and Australia looks set to benefits producers in the Middle East.

Hot commodity: the price of steel is expected to rise by as much as 30 per cent or more this year. Wolfgang von Brauchitsch / Bloomberg
Hot commodity: the price of steel is expected to rise by as much as 30 per cent or more this year. Wolfgang von Brauchitsch / Bloomberg

Middle East steel producers are set to benefit from a surge in prices this year as demand from China and the recent floods in Australia continue to push up costs.

Steel futures rose to a record high in Shanghai yesterday on the back of iron ore prices reaching a nine-month high. This year steel prices are expected to rise by as much as 30 per cent or more, analysts say.

"Steel prices are rising because of a combination of global demand restocking since the beginning of the fourth quarter of last year, combined with rising raw material prices, and exacerbated by the recent Queensland floods," said Melinda Moore, a director at Credit Suisse Equities in London. These floods have restricted coking coal supplies that are used to make blast-furnace-derived steel, since the Queensland area supplies 55 per cent of these coking materials to the global market, she said. "This has further tightened steel supplies, causing panic buying among end customers."

While many of the major steel producers in Europe and Russia rely on coking coal for blast furnace-derived steel, Middle East steel manufacturers use natural gas to produce a different chemical reaction. They do not use coking coal in their processes.

This has meant producers such as Abu Dhabi's Emirates Steel Industries are enjoying higher steel prices due to the coking crisis, but have not suffered from the shortage of the raw materials itself. The Abu Dhabi company, a subsidiary of Abu Dhabi Basic Industries Corporation, is coming off a year when it boosted its rebar production by 7.5 per cent compared with 2009, while output of wire rods rose 64.5 per cent.

The Gulf construction industry is stabilising across the region, said Mubarak al Khaili, the vice president of commercial strategy at Emirates Steel. Construction projects in the region will be the key driver supporting the steel industry's growth this year and next year, followed by oil and gas, petrochemicals and other infrastructure projects, he said.

"Some stability is returning to the GCC's construction sector, with signs of a recovery already showing for 2011," Mr al Khaili said. "We believe that infrastructure projects will accelerate the region's recovery in the next couple of years."

China eclipsed the US and Europe in 2003 in terms of global steel demand, and is now the main driver for the global steel industry, said Raffi Vartanian, an analyst with Freight Investor Solutions in Dubai. However, predicting Chinese manufacturing output and its demand for raw materials is always difficult, he said. "China has closed-door policies and its economic growth is opaque," Mr Vartanian said.

"It is always very hard to gauge what demand will be in China every year. There is not much information on government-sponsored projects."

It is also unclear if global steel prices could continue to be affected by the Queensland weather, said Ms Moore. "It is difficult to tell how long unusually strong seasonal weather conditions will last. Forecasters are suggesting until April," she said.

"Therefore, further flooding in Queensland may not be out of the question. If so, steel prices could be driven higher still as a result of less blast-furnace steel being made."