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STEELMAKERS STRENGTHEN INTERMEDIATE CAPACITY
BY LOUIS WASSER
Egypt’s appetite for steel might seem unusual. In big industrial countries, demand is highest for flat steel used to make engineering equipment, appliances and cars. But in Egypt, like in most of the developing world, it’s all about long steel. The country consumes enormous volumes of long steel rebars – some 4.9 million tons last year, according to the Chamber of Metallurgical Industries.
This gluttony for rebars is part of a global trend that has seen an unprecedented demand for iron and steel. Strong economic growth is driving infrastructure development and real estate demand in emerging markets, particularly eastern Europe, China, India and the Gulf. Demand for steel billets, a semi-finished product that is rolled into rebars, has never been higher, says Alaa Amer, chairman of National Port Said Steel, a rebar exporter. “We are actually approaching an era where there is more demand for billets and rebars than supply.”
Pressure has been building on Egyptian steelmakers, who industry analysts say possess sufficient finishing facilities, but lack intermediate capacity. Egypt’s annual production of billets – the main input in the production of steel rebars – is 3.4 million tons, while another 1.6 tons must be imported. The continuously rising price of billets on the international market has caused domestic steel prices to soar, and forced many smaller players to shut down their lines. “With the [current] high price of billets, there are a lot of mills that have just stopped working,” explains a spokesperson for Taybahsteel.
The Saudi steelmaker recently received one of five new licenses awarded to local and foreign firms to build factories to produce direct reduced iron (DRI) and/or steel billets in Egypt. The Industrial Development Authority (IDA), a subsidiary of the Ministry of Trade & Industry (MTI), issued the licenses to increase Egypt’s self-sufficiency in the manufacture of rebars. “The policy of the ministry now is to secure the inputs for the steel industry locally,” explains Amr Assal, chairman of the IDA. “We are focusing on making the inputs available in Egypt, [in order] to expand local manufacturing.”
Four of the licenses were awarded to steel firms already established in Egypt: Ezz Steel, Suez Steel Company, Taybahsteel and Egyptian Sponge Iron & Steel. The new steel plants are expected to have a combined annual production capacity of 4 million tons of DRI and 4 million tons of billets. The fifth license was sold for LE 340 million to international steel-making giant ArcelorMittal, which won it in an auction. The company’s new plant will produce 1.6 million tons of DRI and 1.4 million tons of steel billets using an electric arc furnace.
The IDA also awarded a license to a subsidiary of Kuwait’s Al Kharafi Group for LE 108 million to produce 6 million tons of steel pellets, which are used in the production of DRI. It is currently finalizing procedures to award a contract with similar terms to Saudi Arabia’s Al Tawairky Group. The new licenses aim to create enough intermediate capacity to cover Egypt’s demand through 2013.
“I think it’s long overdue,” says Taybahsteel’s spokesperson. “We’ve had a high dependency on imports in terms of billets. And with the new power [for steel-making] that the government is making available, I think it’s something that is [following] a logical progression, because the rolling capacity is there. The steel-making capacity will marry to that to make Egypt independent of imported semi-finished product, basically.”
But the change won’t happen overnight. Setting up new steel factories is a capital-intensive and time-consuming process, explains Amer. “This is an industry where you cannot just push a button to increase your production. There is a lag period [before production can begin].” He estimates that it will take between two to four years for the new factories to come online.
When they do, the question will be whether the additional production will stay in the Egyptian market, satisfying rising local demand, or be exported to fetch the highest price. To dampen the incentive to export, the IDA has required that the companies that acquired the new licenses open the new factories outside the country’s free zones, under the local investment regime. This way, the IDA has “all the mechanisms that guarantee [their production] will cover domestic needs,” Assal explains. “Manufacturers can [still] export, but we can ask them to stop if a crisis arises.”
The subtle language might have been lost on the companies awarded the licenses. “Our understanding is there will be no government intervention in the market,” says Taybahsteel’s spokesperson. Whether or not the products will be exported “will be purely a price factor.”
Serving the domestic market would seem inevitable, as the gap between the local and international steel prices is largely offset by shipping costs and the LE 160-180 per ton export duty on steel. Giving the example of his own firm, Amer explains that National Port Said Steel supplies its finished rebars to both domestic and foreign buyers. “We have to satisfy the local market and we have to access the international market... for part of the foreign exchange required to import raw material. So there will always be a balance between local and Ainternational [sales],” he says. “We’re doubling our [finishing] capacity so we can maintain the same ratio between the local and international market.”
It is hoped that the issuance of new steel licenses will bring stability to the market. Mohamed Sayed Hanafi, general manager of the Chamber of Metallurgical Industries, points out that the price of steel billets has become commoditized, with billets now trading on the London Metal Exchange, but the price of iron ore is fixed periodically by suppliers. So by relying less on billets and more on imported ore for the production of steel, Egyptian firms will be less subject to price fluctuations.
Domestic steel prices, however, seem unlikely to fall significantly in the near future, even if the licenses eventually help to stabilize them. “It’s a supply and demand market,” says Amer. The current commoditization of billets, he states, ensures that they are “priced according to the international market.”
And those international prices will likely continue to rise in the short and medium term, argues Hanafi, who says investor flight from the dollar into commodities such as metals is one of two main factors driving this trend. The other is expanding markets in India, China and the Gulf that are rapidly developing their infrastructure. “That means new construction, new buildings and new plants – which consume a lot of steel. Although these [regions] are big producers of steel, it hasn’t been enough till now, so within the next three to five years we can expect increased [prices].”
But eventually they will peak. And when they do, the value of the licenses may become clearer. “Every country in the world [now] has viable steel production,” says the spokesperson for Taybahsteel. “When world prices stabilize and Egypt has its own DRI production facilities, I think as a steel-producing nation it will be [on a] much more solid base.”
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