A perfect storm for GCC steelmakers

The Covid-19 pandemic, combined with the timing of the oil price collapse, could have created one of the most hostile steel markets for the GCC region ever.

Even though governments in the region quickly imposed measures to curb the spread of the virus, the construction and steelmaking industries were categorized as essential and were not subject to closures, but operations needed to be scaled down.

Governments in the GCC are already aware of the dangers of a non-diversified economy. The Saudi Arabian budget for 2020 assumed an oil price of $65/bl, while the Omani budget envisioned a price of $58/bl. At its lowest level, Argus assessed the Dubai crude spot price at $13.61/bl on a fob basis on 22 April.

In 2019, non-oil GDP in Saudi Arabia rose by 3.3pc, a rapid increase spurred by high levels of investment in other sectors as a result of an ambitious diversification plan. But this effort is still in its infancy and the GCC region still overwhelmingly relies on oil revenues to subsidize newer industries. The collapse all but eliminated growth for non-oil sectors in the region for the year, with a risk of a recession looming.

Steel demand: A downward curve

After East Asia and the Pacific, the Middle East and North Africa accounts for the largest infrastructure spend as a proportion of its GDP, according to the World Bank. About 6.9pc of the region’s GDP is spent on infrastructure development due to a rapid period of industrialization in North Africa and growth of the tourism industry in GCC regions.

But even prior to the Coronavirus and oil price fall, the UAE’s PMI numbers had begun to freefall. After a significant peak of 59.4 in May 2019, confidence steadily dropped and the country hovered around the 50 mark at the end of the year, indicating no growth. In 2020, the index promptly fell below 50 for the first time, reaching 45.2 in March, meaning a contraction in activity. Saudi Arabia similarly saw its index fall below 50 for the first time as it dipped from 52.5 in February to 42.4 in March. In Qatar, the PMI has frequently contracted, hitting its lowest ebb in July 2019 at 45.2 and never exceeding 50 in the months since.

Source: IHS Markit

Construction activity was dropping in the GCC region as early as the third quarter of 2019. Not only is the number of projects announced dropping but so is the value invested. In the first quarter of 2019, the average project cost was $222 million, but this dropped by almost $100 million a year later. With the announcement from the UAE that all projects would be suspended until further notice, it is unlikely more will be announced from this country in the second quarter and this number is likely to fall further. A significant number of projects for 2020 were already completed in the first quarter and it is thought that the majority of procurement for megaproject Expo 2020 has already been carried out.

Source: BNC

A rising supply

Since a high of just over 1mn t in June 2016, the UAE’s steel product imports have steadily declined, with February 2020 registering imports of almost 190,000t for all steel products. In the last year, exports and imports have mostly balanced out, meaning the country’s net steel consumption averages around 370,000t/month. While demand was high during the country’s construction boom, consumption exceeded production levels but in March a dramatic drop in export and import activity is a warning sign for mills that are finding that their production levels now exceed total domestic demand.