Emirates 24x7 reported that a sudden spurt in the price of iron ore in the international market has caught local steel traders and manufacturers and a host of other steel dependent industries, off guard. The consequent increase in steel prices has singed many traders who were bearish about steel due to the slowdown in the construction sector and the overall economic downturn in the country.
In such a scenario, they are being forced to buy steel at higher prices prevailing abroad and sell it cheaply in the domestic market to honor existing contracts that were finalized a while ago when steel prices were low based on lower global iron ore prices.
Unlike in the past, when steel prices shot up mainly due to demand and supply factors, the reason for the current increase is the high iron ore price demanded by the major ore producers like Vale, the Rio Tinto Group and BHP Billiton, which together control about two thirds of global trade.
Brazil's Vale, the largest iron ore supplier, last week broke a 40 year custom of selling ore on a yearly contract at a fixed rate and won a 90% price increase from Japanese mills. Analysts are predicting a considerable increase in costs for steel using industries and the automobile, construction and metals industries.
Mr Rizwan Sajan chairman of Danube Building Materials said that the steel price has gone up by almost 30% across the Gulf Co operation Council states over the last couple of weeks and the price per ton of steel is AED 3,000 in the UAE, OMR 320 per tonne in Oman and BHD 300 per tonne in Bahrain.
He added that due to depressed market conditions, the domestic steel price in the UAE is even lower than the metal's price in other Middle Eastern markets like Syria, Iran, Libya and Egypt. In the short term, the high international steel price will adversely affect local contractors, who are trying to stage a comeback after the Dubai World debt settlement.
Mr Sajan expects a price correction within a few months, but says it is impossible to predict by how much. He added that all players in the steel supply chain were working on minimum stocks and now there was a shortage in the market.
He said that "There is a general shortage in the market and overall availability is tight. This sudden, unexpected price hike is a further blow to steel traders. On one hand, we have orders from customers at very low rates while on the other, our present procurement rates from steel mills abroad are high. We are taking positions at USD 720 per tonne and we are not sure what domestic steel prices will be when these orders eventually arrive here."
A number of steel traders and manufacturers expect prices to increase further, but many players in the steel supply chain are cautious about the market trend. A large company facing pressure is RAK Steel, a JV of Ras Al Khaimah Investment Authority and the Middle East Traders Group, which is the second largest steel rebar manufacturing mill in the UAE with a capacity of 500,000 tonnes per year.
Mr Ajay Aggarwal CEO of RAK Steel said that "Steel prices have started going up due to high raw material costs and not due to any additional demand for the product. While prices continue rising, traders or manufacturers, the entire supply chain in fact, cannot absorb this price increase. They will have to pass on the high prices to end users."
Meanwhile, other smaller traders are equally worried, if not more. A steel trader said that "Steel prices have gone up by AED 1,000 per tonne in a short period from AED 2,000 to AED 3,000 per tonne. The Middle East steel demand seems irrelevant to international steel price movements and, in the region, only the Saudi Arabia market is doing well because there are many new projects coming up there."
Scrap prices have shot up by USD 200 from USD 220 per tonne to USD 420. Everybody in the steel supply chain is scared to take on more stock. Not just steel traders, even steel mills and contractors have incurred heavy losses in the recent past due to a sudden decline in steel price from record highs because of the economic slowdown. Traders are now reluctant to keep huge stocks and people are buying only for a month's requirement. Traders who have taken orders from contractors for delivery in the next three months have to respect these orders and deliver steel at agreed lower prices even though they are now procuring the metal at far higher prices. Those who do not have such orders are playing it safe because there is no actual demand for steel. We don't know how long the current price trend will continue.
In the present situation however, local manufacturers are gaining an edge over international importers.
Mr Suraj Malhotra marketing manager at Al Ghurair Iron & Steel said that "The lead time to import from Turkey, India or Brazil is three months, while we can deliver steel within a month. Therefore many traders prefer buying steel from local companies."
The company is a leading cold rolled and galvanized steel manufacturer. It said the current price movement has affected it minimally. However, Mr Malhotra said various industries using steel will see a 20% increase in prices within the next two months.
He said that "We export 30% of our products to Saudi Arabia. Local steel manufactures have an edge now because our lead time is only one month. Importers from India, China or Turkey will take at least three to four months to deliver and we don't know what the price will be after four months. Traders and contractors buying steel from local manufacturers don't have to wait for four months in opening letters of credit, shipping and other delays."
Mr Ramesh Narang from Al Rama International said that "Prices have started going up because of international reasons. Local demand for steel is not great and Saudi Arabia is the only regional market that looks encouraging. As steel traders had a bad year in 2009, they are treading cautiously. The volume of steel trade through the Dubai Gold and Commodities Exchange has been very low recently."
Mr Narang said he was positive about long term trends in the steel market but payment defaults and liquidity problems continued to haunt steel and commodity traders. He added that banks were still willing to finance genuine steel traders.
Mr Aneesh Saifudeen business development manager at Rainbow Engineering Industry, a fabrication company in Sharjah, said that "The steel price increase is a major concern for fabrication units because there is cut throat competition in the sector. Demand is poor in the market and profit margins are between 2% and 5%. Compared with the boom periods in 2006 or 2007, there are many players in the market now competing for fewer projects. In order to attract the maximum business, we are keeping our margins to the minimum and most clients are demanding lower prices."
Mr Saifudeen said there was an acute shortage of some steel products, like UB beams and gif beams, because steel traders were not keeping enough stocks. He added that "Some of the beams used in tankers and vehicle parts fabrication are not available in the local market. There is considerable delay in getting these products from abroad. There are no local manufacturers making these specialized steel beams and we have to depend on imports."
Rainbow Engineering Industry manufactures or fabricates all kinds of heavy vehicle bodies such as high pressure vessels, condensers and storage tanks.
(Sourced from Emirates 24x7)
