Al Ittefaq Steel Products is the largest private sector steel producer in Saudi Arabia
Saudi Arabia's Al Ittefaq Steel Products is hopeful its lenders will see underlying strength in its business during talks to restructure debt worth 6.2 billion riyals ($1.6 billion), its chief executive told Reuters.
The attitude of creditors could set the tone for others in the construction industry with similar difficulties as they grapple with a slump in global steel prices, a flood of cheap Chinese imports and a reduction in government-funded infrastructure projects since oil prices slumped.
"We're obviously hopeful the banks will take a more lenient view, given this is really a systemic issue," CEO Sharjeel Azhar, a former HSBC banker, said in an interview.
Al Ittefaq, the largest private sector steel producer in Saudi Arabia and a subsidiary of Al Tuwairqi Holding, is undergoing its second debt renegotiation in the last seven years after the initial slump in steel prices left it unable to service loans used to fund expansion.
Since then, Chinese producers, which account for about half of worldwide supply, have flooded export markets.
Azhar has been CEO of Al Ittefaq since 2012, when he was put in charge at the behest of shareholders after leading negotiations for the firm on the last restructuring. The original debt deal had been due to run until 2017.
Azhar said the conversations which had taken place so far with banks seemed to take the very poor market conditions into account, and recognised the underlying business was robust.
"If the financiers support the industry, I think things will be fine, but if somebody takes a very hard-line view then you'll start seeing things trip up," he said.
Azhar said it could be another one or two years before the steel industry gets back on its feet.
Saudi Basic Industries Corp (SABIC) said in October it would spin off its struggling steel unit, Hadeed, having booked a 725 million riyal loss on its metals business in the first quarter.
The wider construction industry is having a similarly difficult time. Saudi Oger, one of the largest contractors in the kingdom, is facing the prospect of a multi-billion-dollar restructuring.
Azhar said many of Al Ittefaq's clients are requiring longer credit periods to allow them to meet payments but the company has not seen any defaults.
The Saudi government attempted to help local industry by lifting an export ban in April on cement and steel.
Azhar said his company had not yet begun exporting as he was awaiting clarity on a number of points on the policy change, without going into detail.
Support could also come from raising import duties on steel. A senior United Arab Emirates official said earlier this month the Gulf countries were studying a proposal which would hike the fees.
A rise in global steel prices is what would most benefit producers such as Al Ittefaq, according to Azhar, who believed only Chinese firms could initiate this as they account for so much of global supply.
"As demand has fallen, it's not so much the import volumes that are impacting us but it's the price levels internationally," he said. "The possibility of a low price entering your market is sometimes more threatening than actual volumes coming into your market."
In the meantime Al Ittefaq is working on a restructuring plan with a group of creditors and Azhar hopes to secure an agreement at some point next year.
In total, the company has 18 creditors which are predominantly Saudi banks but which also include HSBC, Standard Chartered and Bank ABC, according to Azhar.
It has been in talks with a group which holds upwards of 60 percent of its total debt and which has been put in charge of negotiating a settlement. The group consists of Saudi British Bank, Arab National Bank, Banque Saudi Fransi, National Commercial Bank, Riyad Bank and Samba Financial Group.