Middle East looks West

International demand for oil and gas is leaving Middle East manufacturers struggling to keep pace.

Increasing oil prices over the last few years have drawn more investors into the oil and gas sector, producing a knock-on effect for the cables industry. With many cable manufacturers left scratching their heads, the industry has turned to the European model to cope with rising cable consumption.

In Europe, consumption is planned for way before it is needed, with orders secured anywhere from 12 and 18 weeks ahead of time. If a company places an order weeks in advance, it is sure to receive it on time. Cable factories work to a six-month schedule and, with planning the deciding factor, the bulk of the order is irrelevant. This is the main difference between Europe and Middle East, where few companies order cables in advance.

"Demand planning is something companies in the Gulf would do well to adopt," said Ziad El Sayad, general manager of the Cable Distribution Centre, a subsidiary of CAE Group. "Here, the last thing companies think about in any development is the cables. There are three criterion for selling cables in the Gulf: price, quality and availability. If you miss any of these, you will not get the deal."

But El Sayad feels the region is finally turning a corner. Huge exploration and production projects have enforced the need for planning, compelling companies to place cable orders well in advance. "Companies want cables, and they want them yesterday. It's a kind of instant demand, which Europe does not experience," added El Sayad.

Unwilling to work to this ‘on demand' model, cable companies in the Gulf are trying to convince their market that planning is an essential process in the supply chain. They are touting the benefits of obtaining quarterly data, indicating cable materials most likely to be consumed over the coming months. With better intelligence leading to more effective demand planning, they claim this kind of information will reduce operational delays. But, says Shome Bag, marketing specialist of 3M's Middle East and North Africa oil and gas division, the challenge in the Middle East is overcoming the industry's reluctance to share information.

"Companies in the Middle East are starting to realise the benefits of sharing information far outweigh the risks," said Bag. "We're not anywhere near the planning standards of the US, but we are on our way."

Another facet of accelerating regional demand is the prospect of the cable industry becoming elitist. In Europe, it is as simple as manufacturing the cables and then shipping them immediately. But in the Gulf, manufacturers are forced to keep large amounts of stock to cope with the need to deliver product with little or no warning. This closes the market to companies without sufficient capital resources to maintain millions of dollars worth of stock, creating an unnecessary barrier to entry.

However, according to El Sayad, there is an upside to the region. He believes the Middle East cable industry is now better placed than Europe, due to the escalating demand for oil and embryonic stage of many emerging cities. In Europe more cable factories are closing than opening. Urban infrastructure is well-established and, despite continuing demand, this is mainly for maintenance, rather than new projects.

In contrast, the Gulf is now a projects market on an epic scale, something particularly notable in the UAE, Saudi Arabia and Iran, by far the biggest market in the region. In Qatar, Oman and Bahrain, the infrastructure is currently being laid, just as Dubai's was thirty years ago. By 2012, Saudi Arabia is projected to represent 47% of Middle East oil production, with the UAE having 12% (Pricewaterhouse Coopers).

El Sayad also said cable companies should be able to roll with commodities variations. He explained how three years ago, the end-user controlled the market - it was small and lack of competition was driving down commodity prices. Since then, demand has grown drastically and new technologies have been met by an associated commodities price rise. Put simply, there is not nearly enough supply to meet demand - so now the supplier dictates the market. Factories have begun setting their own supply times and are constantly operating at full capacity. This is particularly true of Europe and the US. However, this is not sustainable. Growing investment in the industry will ultimately mean supply will outpace demand and prices will stabilise as a result.

Yes, this shift in market control was a result of the 2006 increase in commodity prices and the resulting inventory crunch, where manufactures, anxiously waiting lower copper prices, drastically cut production. But, paradoxically, the price hike turned out to be fortunate for cable manufacturers - but, warns El Sayad, the haven in which they are residing, will not last long.

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