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Wed 7 Apr 2010 10:05 PM

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Gulf steel mills struggle as ore prices shoot up

Uncertainity about when prices level off has caused some mills to trim production.

Gulf steel mills struggle as ore prices shoot up
CUT PRODUCTION: Steel producers in the Gulf region have urged mills to cut production till prices level off, as they are wary of a surge in iron ore prices. (Getty Images)

Steel producers in the Gulf region, wary of a surge in iron ore prices, have urged mills to cut production until prices level off, industry executives said on Wednesday.

Speaking to Reuters, Karel Costenoble, general manager of Dubai based steel industry networking web portal, MESTEEL, said: "People in the region are reluctant to purchase steel right now with the prices on the rise, but still there's a bit of a shortage in the market and local steel mills are not producing at full capacity."

The world's top three iron ore miners - Brazil's Vale, BHP Billiton and Rio Tinto - who have the upper hand in the $80 billion iron ore business are pushing for a revamp of the decades old annual benchmark system.

They want to replace the annual price contracts with quarterly ones and link prices to the iron ore spot market.

Steel billet prices in the Black Sea region and in Turkey climbed towards $650 per tonne during the first week of April, sending steel prices in the UAE to around $844 per tonne from $547 earlier this year, Gulf traders said.

Uncertain about when prices would level off, some mills in the region have decided to trim production.

Bhaskar Dutta, chief executive, Jazeera Steel, Oman, said: "Everyone is sceptical and operating at lower capacity ... we are now only one shift per day, which is 40 percent of our capacity."

Projects in the region may also slow down, said Dutta.

He added: "Many companies in the Gulf have been having finance problems since the start of the economic crisis and now with steel costing more these projects might be delayed futher."

Price volatility is seen as the main factor which has the potential to hurt future sales of the metal, said Abu Bucker Husain, chief executive of UAE based Al Ghurair Iron & Steel.

He said: "We do not have problem in securing raw material ... the problem is with the price, which is so volatile that within a week we are seeing sharp unjustified increases."

Al Ghurair is still operating at full capacity of 200,000 tonnes per year and is passing the added cost on to its consumers, said Husain.

He added: "We have no other choice but to pass the added cost on to our customers; they were reluctant at first, but they are beginning to accept price increases."

In order to minimize the volatility, industry insiders believe top ore miners should set prices on a monthly basis rather than quarterly, said a senior Dubai based industry source.

He said: "If anything it would be better to set prices on a monthly basis and avoid getting stuck with orders that were placed at a high price." (Reuters)

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