Liquid steel

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Japan’s Nippon Steel has announced plans to cut output by 2 million tonnes, or possibly even more.

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The fall in steel price is down to the balancing of the market in line with the world economy, according to Kishnan, while fluctuations in price has made trade tricky.

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The grade of steel used makes a significant difference to the finished product – particularly important for high grade API standard steel products used in line pipe.

Steel's inflated price caused concern throughout the last two years, but with global economic growth slowing, Petrochemicals Middle East asseses the impact for downstream players.

In the burgeoning Middle East market, being able to source equipment and raw materials at affordable prices and when they are needed have been major concerns. With a host of large-scale projects being undertaken over the past decade, the demand for such materials soared, and with this increased demand the prices also sky-rocketed and the relative availability of the resources plummeted.

One of the biggest issues in recent years for those operating in the Gulf has been that of steel availability. With the material being used for applications ranging from structural support in buildings to pipes for the utilities and oil and gas sector, the pull for the available resources has been several fold.

Consumption in the region has continuously outstripped demand, meaning that sometimes very different industries have found themselves in direct competition for the same resources.

But as the construction industry begins to experience definite signs of a slowdown as the current global economic downturn begins to impact the region, does this really mean that the reduced demand from this sector will result in a drop in prices?

Market movements

The price of some types of steel has already fallen dramatically in recent months, and there are indications in the global market towards further cuts in the future. However, this may be counteracted by a reduced output from the steel manufacturers as they struggle to cope with high raw materials costs and a lower market demand for their product. In addition to the downturn in construction, the flagging car market has meant that the amount of steel required on the world market has dropped by a significant amount over a very short period of time.

In mid-January 2009 the world's second largest steel producer, Japan-based Nippon Steel, announced plans to cut its output by at least two million tonnes for the period between October 2008 and March 2009 compared to the preceding six month period. "We have said two million tonnes, but it probably won't stop there," stated Nippon chair Akio Mimura.

The firm is also reportedly considering the closure of a 2.4 million tonne capacity blast furnace at its Kimitsu plant for maintenance in 2009 - three years before the maintenance work was originally planned.

This news comes almost a year exactly after Nippon's shares plunged by 7.6% following a 13% fall in its quarterly profits; these effects were blamed on higher fuel and iron ore prices.

The firm attributes the reductions in production to both lower market demand and increasing pressure for price cuts, especially from the car manufacturing industry. In December 2008 the Nikkei reported that Toyota was expected to ask for a 30% price cut, for example. Nippon reasons that lower material availability will prevent a dramatic drop in prices due to a reduced demand caused by the global recession.

Other steel producers have also announced such production cuts, with the largest such firm Arcelor Mittal dropping its output by 30% and POSCO, the world's fourth largest steel firm planning its first ever output cut.

Price indicators

According to MESteel, the online portal for buyers and sellers of steel in the Middle East, the current market prices are significantly lower than they were a year ago, having fallen in the last few months of 2008 after rising earlier in 2008.

Under its UAE steel price indicator for January 2009, stainless steel HR coils of 316L base now cost US $3500-3600 per tonne, with the material sourced from Western Europe, the Far East, Brazil and South Africa.

In January 2008, MESteel quoted a price of $6400-6500 per tonne for the same product, indicating a reduction of almost 50% since the same month last year. The portal cited steel billets and blooms at a cost of $730-750 per tonne in January 2008, this reducing to $400-450 per tonne in its January 2009 figures. However, a peak of $1180-1250 was reached for the product in July 2008 before the price began to fall again.

It is such wide variations in price over a relatively short time period that has put pressure on firms tendering for work on the region's projects. With materials potentially rising in price by 80% or more during the tender period, the bid price could see the winning contractor operating at a loss from the beginning of the job should it be a fixed price contract, as many are in the construction sector.

Now the prices have dropped this could work in the favour of some firms. However, as many developers and clients are now asking for tenders to be resubmitted even for jobs that are underway, any potential savings to be made may not reach the contractor level. "The prices are being squeezed from the owners down, it's from top to bottom," stresses Sharjah Steel Pipe Manufacturing (SSPM) chief accountant Pram Krishnan.

Variation factors

The recent fall in prices is simply a balancing of the market in line with the world economy reasons Krishnan. "Last year it was all exaggerated prices and the steel manufacturers made money out of this...the figures were high because 2008 was a boom year and the producers took advantage of this situation," Krishnan states. "This year it will go back to 2006/07 prices," he predicts. "Steel is very in demand...but the market is almost stagnant and has been for the past month or so. We expect it to bounce back next month (February)," adds Krishnan.

"The price of stainless steel depends on nickel charges fluctuating in the world market. Alloy steel and low temperature grade steel - the prices are still strong and stable," reports TC Gulf general manager PK Gyaneshwar.

SSPM sources its steel from countries including India, Malaysia and Saudi Arabia, dealing directly with the steel producers. "The demand will remain stable this year because we have to finish projects underway," states Krishnan.

"Steel demand is based on active projects, and in the petrochemical industry projects are still ongoing," adds Gyaneshwar. "Most of the purchasing for long-term projects has been done. Petrochemical projects are still happening and those that started one to two years ago will be completed."

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