FOCUS: GCC billet suppliers look outward amid slowing domestic construction
Billet producers in the Gulf Cooperation Council (GCC) countries have become more active in export markets this year amid a slowdown of construction activity in the region, Fastmarkets has learnt.
Steel demand in the Middle East is expected to shrink by 4.6% in 2019, according to estimates from the World Steel Association (Worldsteel). And the lower demand at home this year has meant that GCC billet is increasingly finding a home in the rapidly growing Asian markets.
Oman was the second largest exporter of semi-finished steel products to Thailand in January-September this year, accounting for 25.1% of the Southeast Asian country’s total imports, or 271,430 tonnes. Bahrain was the fourth-largest source of these products for Thailand in the same period, accounting for 5.3% of imports, or 53,624 tonnes, according to data from the Thai Ministry of Commerce.
This is partially due to the slowdown in GCC construction stemming from reduced government spending in some member countries, the completion of the majority of development projects dedicated to 2022 Fifa World Cup in Qatar, the Expo 2020 in Dubai and an oversupplied property market in the United Arab Emirates.
Reduced capital spending by governments and the private sector amid lower oil prices since 2014 have triggered a four-year slump in construction activity in the Gulf that has shown little sign of recovery in 2019.
In 2018, about $63.4 billion of construction and transport project contracts were awarded in the GCC - the lowest since 2012, according to the regional business intelligence provider MEED. In the first half of 2019, only $22.4 billion worth of contracts were awarded, MEED said.
Lower demand from the UAE’s construction sector has led to Fastmarkets’ weekly price assessment for steel reinforcing bar (rebar), import, cfr Jebel Ali, UAE falling to $438-442 per tonne on November 12 from $510-525 per tonne cfr a year earlier.
The UAE remains the region’s best-performing construction market in 2019, with about $10.9 billion worth of contracts awarded in the first six months, MEED said. But the value of these contracts have fallen year on year due to a large supply of property and a fall in real estate prices in the emirates over the past five years.
These adverse conditions mean private developers in Dubai are holding back on new launches and waiting for the property market to bounce back. They are also awaiting direction from a newly created “higher committee for real estate” in Dubai that will oversee and advise on the sector’s future priorities.
In February this year, Saeed Al-Remeithi, the chief executive officer of Emirates Steel, the UAE’s biggest steel producer, said that the Middle East construction sector was facing problems such as a drop in building selling prices, market volatility, and protectionist measures by some nations.
Current demand for long steel in the UAE is limited despite some recent price increases, market participants have said. Some sources believe prices will increase further due to a rise in production costs globally, while others argue that demand is not strong enough to support such increases.
Qatar, Saudi Arabia
One of the major billet exporters to emerge from the GCC this year has been Qatar, another country that has been facing a difficult domestic construction market. A drop in demand for long products has resulted in Qatari steel output falling 1.1% in January-September to 1.9 million tonnes, according to Worldsteel.
Fitch Solutions has made a significant downward revision of its industry forecast for Qatar’s construction sector. It expects the sector to shrink by 4.1% this year.
The need to build a comprehensive range of transportation systems, stadiums, hotels and other tourist infrastructure from scratch to host the 2022 Fifa World Cup had driven rapid but unsustainable growth in Qatar’s construction sector over the five years prior to 2018, which averaged 22.1% annually, Fitch said.
But with work on projects such as the $2.1-billion Al Khor Expressway and $960-million Lusail Expressway coming to an end, the construction market will see a sharp correction as the government cuts back on infrastructure spending, according to Fitch.
A similar scenario is playing out in Saudi Arabia, where lower demand for long steel has pushed steel output down by 1.1% in January-September to 3.9 million tonnes.
One steelmaker in Saudi Arabia has had to lower its capacity utilization rate for construction steels below 50% this year to cope with the drop in end-user demand, one source at the mill said. The steelmaker is investing in steel grades for the smaller but more lucrative energy market instead.
A major Saudi long steel fabricator said it was now procuring around 40% less standard rebar and wire rod from the market compared with in 2016.
But while GCC markets struggle, billet producers have increasingly turned to Asia - the world’s fastest growing region for steel consumption - for more business.
Worldsteel estimates that steel demand in Asia and Oceania will rise 6.2% to reach 1.25 billion tonnes in 2019.
Asian buyers have been able to pay higher prices than their peers in other regions in recent months, market sources in Asia said.
For instance, a shipment comprising about 20,000 tonnes of Qatari billet was booked by a Thai buyer at $395-400 per tonne cfr, or about $375-380 per tonne fob, at the beginning of November. In comparison, a 10,000-tonne cargo of billet from the Commonwealth of Independent States (CIS) was sold to North Africa at $400 per tonne cfr - equivalent to about $350 per tonne fob for Middle Eastern producers.
A trader in North Africa said that buyers in the region typically preferred billet from Turkey and the CIS because of shorter lead times and more attractive prices.
This week, offers from traders for billet from Oman and Bahrain were heard at $405-415 per tonne cfr Southeast Asia. Mills in the GCC said their offers were at least $425 per tonne cfr Southeast Asia on a back-to-back basis.
China, despite its slowing economy, still has a buoyant construction sector. Worldsteel expects Chinese steel demand to grow 7.8% in 2019. In Southeast Asia and India, active infrastructure investment is expected to drive construction activity over the coming years, Worldsteel added.
Another reason why GCC suppliers prefer to focus on exporting to Asian markets rather than nearer African and Turkish outlets is the cost of logistics, which helps make their product competitive.
“The cost of transporting cargoes through the Suez Canal is an issue,” one source said.
“It costs more to ship from GCC countries to Turkey or North Africa because the vessels pass through the Suez Canal, which takes freight rates above $50 per tonne,” another local source said. In contrast, it costs around $20 per tonne to ship 20,000 tonnes of billet to Asia today from the GCC, he added.
In Asia, it is not just the traditional billet buyers such as Taiwan and Thailand that have been booking billet from the international market this year. Chinese buyers are actively looking for opportunities to import billet again following an increase in domestic prices this week, which keeps an arbitrage window open.
Prices for long steel and billet in China have risen in the last week amid solid demand from the construction sector coupled with logistical bottlenecks.
Qatar was the largest exporter of semi-finished steel products classified under HS code 720711 to China in the first nine months of this year, accounting for 132,392 tonnes, according to Chinese customs data.
At least 100,000 tonnes of billet from Malaysia, India and Iran were also booked at $405-410 per tonne cfr China in the past two weeks, sources told Fastmarkets.
In China’s Jiangsu province, a major entry point for billet, ex-works prices for the semi-finished product were around 3,540 yuan ($505) per tonne on November 14, a trader there said.
This means there is a price spread of around $33-39 per tonne between domestic products and those imports, after taking into account a 13% value-added tax and 2% import duty.
Find out more about the latest developments in the Middle Eastern steel market at Middle East Iron & Steel 2019, held in Dubai over December 9-11. Find out more here.