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GCC steel producers must merge for greater competitiveness: GIC study

According to a study done by the Economics & Strategy Division of the Gulf Investment Corp. (GIC) the Middle East is seen to increase its crude steel production by 70 per cent to 26.1 metric tonnes (mt) by 2010 from 15.4mt in 2006.

"GCC producers, in order to flourish, would have to become more efficient and flexible," said the 52-page study, entitled 'The Steel Industry Worldwide and Regionally: Assessment of Developments and Outlook'. "In the final analysis the region will be subject to the globalisation forces impacting producers in both developed and developing countries."

While the effect of globalisation will not be felt by regional steel producers in the short- to medium-term because of GCC's strong energy sector, the July 2007 GIC study, the first in its Sector and Industry Studies Series, said the long-term prospects are different.

"The profitability of the GCC producers, however, will depend on their ability to be flexible, market-oriented and efficient," the study said. "It also will depend on how long an economic boom the region will enjoy in the coming years."

It said there are good prospects for more finished steel imports for the GCC countries, which are currently negotiating possible free trade agreements (FTA) with China and India. It stressed, however, that it would be more profitable for the Gulf states to introduce a tariff-incentive on imports of semi-finished products such as billet, then rolling it in the region, as compared to importing finished products.

Last year, government officials from the GCC concluded the third-round of talks with China. As a regional bloc, the GCC signed a bilateral accord of economic cooperation with India in 2005 to initiate FTA negotiations.

The study said that steel demand in the GCC region would be in the range of 20mt in 2007 to 30mt in 2010, while demand in the whole Middle East would increase from 70mt to 90mt for the same period.

It said that GCC net imports of products such as ingots and semis, steel tubes, seamless, hot rolled rod in coil, cold drawn wire in coil, welded tubes and cast iron pipes would fall to 5.4mt by 2010 due to the expected increase in domestic production. Kuwait, the UAE and Saudi Arabia are the giant importers of these products, followed by Oman and Bahrain.

It said the Middle East has been one of the world's active regions for steel plant suppliers in recent years because of the increasing demand from a strong construction boom, but these plants mostly started producing lower steel-making base in flat products. Production of flat steel increased to 18mt in 2004 from 9.9mt in 1997, mainly because of Turkey and Iran, and then Saudi Arabia and Egypt.

It added that while the Middle East steel market is "highly fragmented", with 51 of 62 producers having production capacity of below one million tonne a year, the GCC market is even "more fragmented", with 14 out of 15 companies having an annual production capacity of below one million tonne each.

A Kuwaiti firm providing financial services to promote private enterprise and support economic growth in the GCC, the GIC admitted that it is an interested party in the steel industry as investor. But it said that is also in the best interest of the company to be objective about this analysis.

While GIC is recommending steel companies to merge for greater competitiveness, it stressed that consolidating poses potential risks, including pressures on small regional producers and competition from China. Local producers in the GCC countries of Saudi Arabia, Kuwait, Bahrain, Qatar, the UAE and Oman will also have difficulty competing if there are large capacity increases in the GCC region and a slowdown in the demand.

Saying that steel is a cyclical business — meaning, that a change in global demand and supply due to world economic cycle will have impact on prices — the study stressed that greater consolidation would reduce volatility.

It said this was the reason why Mittal Steel of India, the world's biggest steel company whose total production reached over 60mt in 2004, recently acquired Europe's Arcelor, the second biggest company with production of close to 50mt, for $32.2 billion. It added that in Europe, the merger of Arbed, Acerelia and Usinor formed Arcelor, which in turn boosted its Latin American interests by acquiring Dofasco.

In 2004, Mittal took over the American firm, International Steel Group, and has likewise taken control of Ukraine's Krivorozstahl. It has also shown interest in buying minority stakes in Chinese companies and recently bought 37 per cent of steel pipe maker in China.

Another big merger happened when Japan's Nippon Steel and South Korea's Posco, Asia's two biggest steel makers, agreed on a five-year partnership in 2000 and was renewed in 2005. Tata, another Indian steel company, recently took over UK's Corus Group for $12.2 billion and created the world's sixth largest steel producer.

The US's largest integrated steel producer, US Steel, initiated talks in 2006 to acquire AK Steel, the third largest US-based steel maker. AK Steel was reported in May 2007 to have been eyed by Arcelor Mittal for $4.5 billion.

The study said these acquisitions, done or happening, show that the biggest steel producers are in Asia — particularly India, China, Japan and South Korea — whose combined production of 287mt accounted for some 23 per cent of global steel production last year.