Emirates Steel is looking to expand up the value chain as a glut of cheap Chinese steel products threatens to cut into UAE company margins.
It wants to sell more “high-margin, high-strength value-added products”, it said in a statement yesterday.
“By adopting this model we will continue to protect our bottom line amid the current challenging industry circumstances,” said Saeed Al Romaithi, Emirates Steel’s chief executive.
Falling prices have squeezed profit margins worldwide as oversupply at Chinese steel firms fosters a global excess of the metal.
Capital Economics, a research firm, expects US steel prices to fall to about US$600 per tonne – down from the metal’s 2011 peak of more than $700 per tonne.
Caroline Bain, senior commodities economist at Capital Economics, said that it would be sensible for Emirates Steel to sell steel products with higher value-added, to reduce the threat from Chinese exports.
Capacity utilisation in China stands at 70 to 75 per cent, while capacity grew at about 8 per cent last year. Chinese demand for steel is losing pace, however, as overall growth slows and the real estate sector remains weak, according to Capital Economics.
Approximately one third of the country’s steel manufacturers operate at a loss, but that does not mean that cuts in Chinese production are likely, Ms Bain said.
Closures are politically sensitive in the state-owned Chinese steel market, which is both a major employer and source of revenue for China’s local governments.
Excess Chinese supply combined with low domestic prices – $200 cheaper per tonne than US prices, on average – has meant that China’s steel producers have been looking abroad for business.
But in the US, new protectionist measures to prevent Chinese steel manufacturers undercutting American firms is likely to limit the options of Chinese firms. In June, Congress passed anti-dumping measures to restrict the quantity of Chinese steel imports to the US.
The Arabian Gulf is one of the few areas worldwide where demand for steel is increasing, Ms Bain said.
High levels of infrastructure spending, megaprojects such as the Qatar 2022 Fifa World Cup and Saudi’s King Abdullah Economic City, and a resurgence in construction as the real estate market picks up, have all ensured robust demand for steel in the region.
Despite a burgeoning domestic industry, supply is still insufficient to cater for these projects, meaning that iron and steel are imported on a large scale from foreign producers.
The UAE exported iron and steel valued at Dh17.9 billion last year, according to the Federal Customs Authority, compared to imports of Dh40bn over the same period.
Low electricity prices give the UAE a comparative advantage in aluminium and steel manufacture, both of which have highly energy-intensive production processes.
“The fact that energy is so subsidised means that Gulf steel producers can be very competitive, and there’s the capital for very big investments, which are needed in this sector,” Ms Bain said.
As the cost of iron ore and coke, a fuel similar to coal, have fallen, the overall cost of steel production has also declined. This has likely helped UAE firms’ balance sheets, said Ms Bain.
Steel and aluminium are strategically important industries for the UAE Government, as it seeks to diversify away from dependence on hydrocarbon exports.
In April, Emirates Global Aluminium (EGA), formed from a merger of Dubai Aluminium and Emirates Aluminium, was officially incorporated.
Jointly-owned by Investment Corporation of Dubai and Abu Dhabi’s Mubadala Development, EGA aims to be the world’s fifth-largest producer of aluminium by the year’s end.
The company expects to increase capacity to 2.4 million tonnes a year when an expansion at its Abu Dhabi facilities is completed.
abouyamourn@thenational.ae
