Saudi Arabia is pushing ahead with steel intensive projects

Saudi steel industry booms as projects fuel surge in prices. Saudi Arabia is pushing ahead with steel intensive projects, including a major railway. by Nadim Kawach
A sustained economic and construction boom triggered by soaring oil prices has given a strong push to the steel industry in Saudi Arabia and strong demand has boosted prices to one of their highest levels, a key Saudi bank said yesterday. Despite hectic competition from imported steel, the local industry is projected to continue flourishing because of surging demand as the kingdom is pushing ahead with projects worth more than $460 billion (Dh1.69 trillion), including a major steel railway linking its east and west, the National Commercial Bank (NCB) said in a study on Saudi Arabia's steel industry, which was sent to Emirates Business. Its forecasts showed total supply of iron and steel products will grow by 13.8 per cent to 15.57 million tonnes in 2008 with domestic demand set to absorb 89.4 per cent (13.9 million tonnes) and exports 10.6 per cent (1.65 million tonnes). Supply from domestic production meets nearly 55 per cent of the total market demand while imports account for the remaining 45 per cent. Saudi crude steel output rose by 21.9 per cent to 1.3 million metric tonnes in the first quarter of 2008 from the first quarter of 2007. The report showed the kingdom's exports of iron and steel products will rise by about 6.5 per cent to 1.65 million metric tonnes in 2008. Domestic demand for steel products is projected to expand by nearly 14.7 per cent to 13.92 million metric tonnes in 2008. Total market value of iron and steel products is expected to rise 18.7 per cent to SAR43bn (Dh42.17bn) in 2008. "The Saudi economy doubled since 2002, with GDP rising from SAR707bn to SAR1.41 trillion in 2007 and the medium-term outlook through 2010 is very favourable. The current boom is accompanied by an acceleration of economic reforms and sharply growing inflows of foreign investment, adding to the sustainability of the boom, but with inflationary pressure," it said. "In the next five years, a growing number of mega-projects with estimated investment of SAR1.73trn are entering implementation stages while some of them have already started civil works that we expect to continue in the next 15-20 years. All of these projects contain a large construction component which would induce aggregate demand for steel and cement. We expect growth in steel demand to remain strong in the coming years." According to NCB, Saudi Arabia's largest commercial bank, the kingdom's steel industry has been successful in achieving import substitution of numerous products, particularly those subjected to 20 per cent protective custom duty. The figures showed Saudi steel imports jumped by nearly 40.1 per cent to 6.4 million metric tonnes in 2006 and are estimated to have edged up further by five per cent to about 6.7 million metric tonnes in 2007. In the same period, Saudi Arabia exported 1.5 million tonnes and 1.6 million tonnes, respectively. Thus, net imports (imports minus exports) shot up by 84.6 per cent to 5.2 million tonnes in 2006 and are estimated to have risen by 6.1 per cent to 5.2 million tonnes in 2007. In value term, steel imports rocketed by 70.6 per cent to SAR21.4bn in 2006, and are expected to have further grown by 2.4 per cent to SAR22bn in 2007. "One of the significant achievements of the Saudi iron and steel industry has been its clear ability to expand exports while enhancing the value-added factor in the domestic economy," the study said. "In general, the overall iron and steel industry has reached a development stage whereby it is not only competing with foreign products in the domestic market but also has captured a notable share in the neighbouring foreign markets." According to the study, at an overall average price of SAR2,620 per tonne, the aggregate market value of iron and steel products sold by the Saudi Arabian companies is estimated to have swelled by 24 per cent to SAR36.2bn in 2007. "The sharp rise in steel prices and volume of consumption in the kingdom were the major factors behind rising market size last year," it said. "Thus, in the domestic market perspective, the likely future of capacity overhang situation would tend to intensify competition among local steel producers and foreign exporters. "This, however, is likely to affect domestic steel producers' long-term profitability notwithstanding, the kingdom's supportive regulatory regime along with cheap energy cost and the protective tariffs, local industry will continue to maintain a competitive edge over foreign producers," the report said. The study noted that the massive wave of ongoing construction activities in Saudi Arabia has created what it described as a "sizeable transient demand" for building materials including numerous steel products and reinforcing bars. "In addition, the establishment of seven new economic cities and the approval of the much awaited steel intensive railway project linking east and west of Saudi Arabia are set to create huge amount of demand for steel in the next five to ten years. In response to emerging huge transient demand, major players in the steel industry have drawn plans to expand industrial capacity," the study said. "Upon completion of planned capacity and enhancement programmes, excess capacity above sustainable capacity demand is widely feared amongst industry analysts. Thus, in the domestic market perspective, the likely future of capacity overhang situation could tend to intensify competition," added the report.