Sensing an industry consolidation in the works as steel prices plummet worldwide, Saudi Basic Industries Corporation (Sabic) plans to be a buyer, not a seller. The Saudi metals group said it would more than triple steel production capacity by 2020 to 17 million tonnes through acquisitions and by building new plants. "There will be some acquisitions and mergers. We are in the market for it," Hisham al Hamili, the general manager of Sabic, told an industry conference in Dubai yesterday.
Sabic's expansion strategy illustrates how large government-owned industrial enterprises in Middle Eastern oil producing countries are among the best positioned companies in the world to take advantage of acquisition opportunities that are opening up as a result of the world financial crisis. The national treasuries of countries such as Saudi Arabia are awash with oil revenues, setting them up to provide financial backing to state-owned companies that are aiming to leverage global economic weakness to their own advantage.
Prior to July, when oil prices peaked, no one was talking about selling steel assets, Mr Hamili said. "Now opportunities are in the kingdom and the region," he said. Sabic is plotting its expansion even as its steel subsidiary, Hadeed - the largest Saudi steelmaker - has been forced to slash prices amid forecasts of weakening steel demand for the rest of this year. Hadeed announced last week it would cut prices for reinforcing steel bars by an estimated 14 to 15 per cent.
"Sabic had to cut prices after competitors made similar moves," said one steel trader. After almost doubling in the past two years, Saudi steel prices recently started to fall after the kingdom banned scrap metal exports and as spiralling steel costs finally started to take a toll on domestic demand, which had been bolstered by massive government spending on infrastructure and housing projects. By last month, prices had fallen by about eight per cent from their peaks earlier this year, Shabir Rafiqi, the chief financial officer of Al Ittefaq Steel Products, told Reuters. He predicted a further price drop of as much as 15 per cent by the end of the year.
Steel prices have also fallen elsewhere in the Gulf and around the world as the global credit crunch and weakening economies worldwide have crimped construction spending. South Africa's biggest steel producer, a unit of Luxembourg's ArcelorMittal, late last month notified customers of a price cut on long and flat steel, to take effect from Nov 1. The previous month, it had confirmed an average five per cent cut on its steel products from Oct 1. The company, whose European parent competes in global markets as one of the world's largest steelmakers, said its price revisions were based on "material reductions" in selling prices for steel in the US, Germany, China and Russia.
Chinese steel prices have fallen by more than 20 per cent since peaking in early June, due to shrinking domestic demand. Traders said prices for some products, such as hot-rolled coils, had fallen below production costs for many Chinese steel mills. In Russia, steel prices have declined steeply this month as export prices and domestic steel demand have both plunged. Although it expects the steel market to continue weakening for several months, Sabic expects Saudi prices to start rallying next year, buoyed by a backlog of infrastructure projects in the kingdom.
Saudi Arabia's annual steel production capacity stands at roughly 8.4 million tonnes, to which Hadeed can contribute up to 5.5 million tonnes, according to the industry association, Arab Steel. Global steel production this year is forecast to reach about 1.4 billion tonnes. tcarlisle@thenational.ae
