By Joel Bowman at the Abu Dhabi Economic Forum
Competition from China and tumbling US dollar putting pressure on firms, economist warns.
Gulf steel producers must consolidate if they are to survive in the coming years, faced with growing competition from China and the tumbling value of the US dollar, a leading economist warned on Sunday.
Soliman Demir, chief economist for Kuwait-based Gulf Investment Corporation (GIC), said surging Chinese exports of cheap steel would force Gulf produces to cut prices in order to remain competitive.
"Local producers will face an attack on prices from cheaper Chinese companies [in the next few years]," Demir said, speaking at the Abu Dhabi Economic Forum.
At the same time, Demir said the rising cost of raw materials linked to Gulf Arab states' currency peg to the weak dollar would increase production costs.
Gulf states' peg to the dollar has driven up the cost of iimports from region's such as Europe.
The economist said the only way for Gulf companies to succeed as profit margins get squeezed would be to consolidate, giving companies better platforms for negotiations and the ability to ride out cyclical downturns in the sector.
"If you look at the industry in the GCC, the picture is not encouraging... You can not survive if you are small," Demir said.
"The ten largest companies [in the world] represent about 27% of global steel production," Demir said, adding that only three companies in the whole of the GCC produce more than three million tonnes per year.
The world's largest steel maker, Arcelor-Mittal, produces around of 118 million tonnes of steel per year.
Demir said much of China's success could be attributed to mass consolidation in the steel sector, adding that the GCC should follow this model.
He said China recently became a net exporter of steel despite being the single largest consumer of the metal in the world, with over one-third of total global consumption.
China produces approximately 489 million tonnes of steel per year, he said.
Demir, however, did point to the GCC's abundance of energy and geographical location as advantages over other steel producing nations.
He said that as the leading producers of hydrocarbon-based energy in the world, the GCC and wider Middle East region could execute the energy intensive production process at less cost, which would drive down costs and make them more competitive.
He also highlighted the GCC's proximity to steel consumer nations as bringing down transportation costs and time.