shifting to firmer ground? November 2010 The MENA steel industry - - PowerPoint PPT Presentation

MENA steel after the financial sandstorm: Is growth shifting to firmer ground?

Gilles Calis, SteelConsult International

November 2010

The MENA steel industry has shown resilience during the crisis

November 2010

Crude steel output, index (May 2008 = 100)

Source: WSA, SteelConsult

2008 2009 2010

20 40 60 80 100 120 140 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O 20 40 60 80 100 120 140

China & India EU, NAFTA & Japan World MENA

3

Source: SteelConsult analysis, WSA, UN Steel Statistics, ISSB

Supply of steel in MENA region by source (m tonnes)

13 13 14 13 15 16 18 19 21 22 25 26 28 27 27 28 1 3 3 3 4 5 7 7 8 9 10 10 9 9 7 8 9 10 10 11 14 15 14 13 15 16 24 26 25 22 2 3

10 20 30 40 50 60 70

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e

0% 10% 20% 30% 40% 50% 60% 70% Net imports of finished steel Net imports of semi-finished steel Crude steel output in MENA region % dependency on imported steel

% of steel requirements imported from outside

Steel consumption is expected to decline modestly in 2010, but local production has gained market share from imports

Source: SteelConsult Notes: *DRI/EAF mill **Integrated mill ***scrap based EAF Note: All data are averages for Calendar Year

315 338 386 332 61 17 26 33 51 14 29 4 45 33 29 54 30 27 32

28 28 28

42 26 5

100 200 300 400 500 600 700 800 900

GC C (ex wo rks)* Ukraine (del Gulf)** T urkey (del Gulf)*** C hina (del Gulf)**

Import duty Freight billet to Gulf Other operational production costs Labour Energy Freight raw materials Raw materials

Operational production cost/t billet, US$/t, 2009

204 254 278 262 52 14 26 33 51 14 29 4 46 33 28 54 26 23 27

22 22 22

22 33 5

100 200 300 400 500 600 700 800 900

GC C (ex wo rks)* Ukraine (del Gulf)** T urkey (del Gulf)*** C hina (del Gulf)**

Import duty Freight billet to Gulf Other operational production costs Labour Energy Freight raw materials Raw materials

Operational production cost/t billet, US$/t, 2010e

2009 2010e

November 2010

Cost competitiveness of GCC mills has weakened in 2010, but import duties have helped

Billet import price GCC Billet import price GCC

Source: SteelConsult analysis, SBB Note: Contractual years (April to April) until 2009, average of quarterly prices of Calendar Year for 2010

Price (US$/dmtu)

22 21 19 21 25 53 38 37 86 17 59 49 50 47 52 62 116 112 118 220 114 231 28 29 29 31 36 63 74 81 134 97 172

50 100 150 200 250 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 50 100 150 200 250

Pellet premium Pellets Iron ore (SSF)

November 2010

MENA mills remain vulnerable to the global pellet premium

Source: SteelConsult Notes: *DRI/EAF mill **Integrated mill ***scrap based EAF

329 178 186

143 53 85 393 64

161 153 156 177

135

100 200 300 400 500 600 700 800 900

GC C (ex wo rks)* Ukraine (del Gulf)** T urkey (del Gulf)*** C hina (del Gulf)**

Other (labour, energy, freight, import duty) Scrap & Other RM Coal Iron ore

Operational production cost/t billet, del GCC, US$/t, Q2 2009 134 76 93 76 79 39 60 249 56 152 140 144 157

100 200 300 400 500 600 700 800 900

GC C (ex wo rks)* Ukraine (del Gulf)** T urkey (del Gulf)*** C hina (del Gulf)**

Other (labour, energy, freight, import duty) Scrap & Other RM Coal Iron ore

Operational production cost/t billet, del GCC, US$/t, Q3 2010

Q2 2009 Q3 2010

November 2010

Turkish mills have seen a sharp improvement in their competitiveness of late, are we going to see a resumption of exports to the GCC?

The price of oil has bounced back sharply…

November 2010 20 40 60 80 100 120 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10e

Oil price (annual average, US$/barrel) Consumption of finished steel MENA (m tonnes) Oil price/finished steel consumption

Source: EIA, SteelConsult

And oil based revenues in 2010 have climbed back to 2007 levels…

November 2010 50 100 150 200 250 300 2005 2006 2007 2008 2009 2010e

Qatar Saudi Arabia UAE Oil and gas exports (bn US$)

Source: OPEC

14.1 5.1 5.0 3.3 2.1 0.4 2.1 0.4

2 4 6 8 10 12 14 16 USA Japan China Germany MENA Italy State of Michigan Saudi Arabia

GDP (trn US$), 2009

Source: CIA World Fact Book

• Despite the region’s wealth, GDP is relatively modest

compared to developed economies. GDP in the whole MENA region is only as large as that of Italy, whilst GDP

• f Saudi Arabia is comparable to that of the state of

Michigan.

• What makes the energy based wealth in the region

special is the relatively small size of the national population in most of the oil and gas rich countries, the small number of decision-makers who control spending and the high extent of investment in steel intensive applications, in particular construction.

Fast decisionmaking has also speeded up recovery…

November 2010

Real estate investment, more than infrastructure and other sectors, boosted steel consumption in the boom years…

November 2010 10 20 30 40 50 60 70 80 90 2000 2001 2002 2003 2004 2005 2006 2007 2008

Real estate Infrastructure Other sectors

Source: MEED, SteelConsult

Spending on capital projects GCC (bn US$)

Source: MEED Projects

Part of growth, esp. in Dubai, was based on a speculative bubble. Dubai has indeed been much harder hit than Abu Dhabi and the rest of the region

November 2010 50 100 150 200 250 300 350 400 450 500 Oman Bahrain Kuwait Qatar Saudi Arabia UAE Source: MEED, SteelConsult

Capital projects on hold or cancelled (bn US$) Dubai Abu Dhabi Other emirates

Source: MEED Projects

The UAE will remain a substantial market for steel, though growth in the next 5 years will shift away to Saudi Arabia and Kuwait

November 2010 50 100 150 200 250 300 350 400 450 500 Bahrain Oman Qatar Kuwait Saudi Arabia UAE

2005-2010 awarded 2010-2015 planned Growth

Source: MEED, SteelConsult

Capital projects awarded/planned (bn US$)

Source: MEED Projects

Longer term opportunity #1: Once stabilized, Iraq has a huge potential for steel consumption growth

November 2010

2 4 6 8 10 12 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 ff

Finished steel consumption, Iraq (m tonnes)

Source: SteelConsult

 Iraq has seen steel demand grow fast since 2007, but at 1.5m tonnes of steel in 2009, or 48kg/head, Iraq’s consumption is still embryonic.  If the country stabilizes further, its huge, dormant potential steel market could gradually be unlocked:  The country has 31m inhabitants;  Decades of underinvestment and violence have left the country in ruins. Huge investments need to be made for the (re)building of infrastructure, industry, utilities and housing;  At 115bn barrels, it holds the world’s 3rd largest reserves of oil, after KSA and Iran.  ~US$300bn of existing and future capital projects are planned in Iraq, and the country is expected to see major contracting activity in the next 5-10 years.  In a stable situation, we estimate steel consumption in Iraq could grow to at least 10m tpy.

Potential market in future

Longer term opportunity #2: The GCC has an opportunity for 4 medium sized car plants in Saudi Arabia and/or the UAE, or >1.2m tpy of auto steel

November 2010 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2005 2006 2007 2008 2009

Other GCC UAE Saudi Arabia Car imports GCC (‘000 units)

Source: UN Trade Statistics

Conclusions

 The MENA steel industry has coped well during the crisis, but remains vulnerable to foreign competition  Steel consumption in the MENA region has been hit, though the emirate of Dubai is the only part of the region where the market has truly collapsed, as the real estate bubble burst  Future growth in consumption will be slower, but more sustainable and in line with real demand  Oil & gas revenues will remain strong, and oil & gas-rich countries will retain an advantage. Whilst steel market fundamentals will continue to be weak in Dubai, growth in the coming years will shift to Saudi Arabia, Kuwait and Abu Dhabi.  In the longer term, we see two other potential key drivers of growth in the region:  The development of Iraq could add another 8.5m tonnes of steel or more to regional demand;  The GCC region is importing some 1.2m vehicles per year, presenting an opportunity for diversification and increase of local steel consumption, esp. in higher quality flat steels.

November 2010