Quarterly Report – July 2020

The first quarter of the year was promising to be relatively successful for steelmakers when compared to the latter half of 2019. For the second quarter of 2020, however, all of the indicators are likely to show an unprecedented decline, with steelmakers expecting a drop in demand of more than 50% in the next two quarters. Much remains unknown, but prevention of a resurgence of the pandemic should quickly restore the markets.

The Jordanian government has applied a duty of 50 dinar per tonne on HS Code exports to support and maintain the flow of steel scrap to local mills. And in mid-May, the UAE banned exports of ferrous scrap for a period of four months to ensure domestic steelmakers have sufficient feedstock to maintain operations. The ban relates to HS Codes 720450, 720449, 720430, 720429 and 720410, thus encompassing virtually all ferrous scrap exports, as well as to HS Code 720421 which is stainless steel scrap.

The UAE’s ban effectively removes one of the largest sources of ferrous scrap supply to South Asia. In a normal trading environment, loss of these UAE exports would drive a significant increase in ferrous scrap import prices in South Asia, which would then have a knock-on effect on prices globally as European suppliers would move to divert volumes to containerized sales in order to benefit from the higher South Asian prices, thus impacting bulk availability.

The situation is similar for Saudi Arabia. Although the country is much less export-oriented, the issue could be much more exacerbated. One solution may be to ramp up exports and decrease imports, but the problem is that there is insufficient local semi-finished steel available to feed the mills, meaning some imports are essential to keep them running. Furthermore, Saudi Arabia traditionally does not export finished steel products because of its ability to command higher prices domestically.

Construction activity had been declining in the GCC region as early as the third quarter of 2019, with a drop in project announcements and money invested. In the first quarter of 2019, the average project cost had been US$ 222 million but this had fallen by almost US$ 100 million a year later. With the announcement from the UAE that all projects would be suspended until further notice, a significant number of those planned for 2020 was completed in the first quarter of the year. Furthermore, it is tough that the majority of the procurement for Dubai’s Expo 2020 mega-project has already been carried out.

The following challenges are facing the steel industry in the Middle East and North Africa (MENA) region:

* Arab governments have been postponing or cancelling projects following the fall in oil prices given that 70% of production input in the region is manufactured from petroleum products. These countries include Libya, Iraq and Egypt, as well as the Gulf countries.

* There was a decrease in industrial output growth in the Arab region from 2% in 2018 to 0.6% in 2019, thereby negatively affecting the volume of local projects and hence steel consumption.

* Political turmoil in the region is having a negative effect on the steel industry and on consumption, although there is still hope for plans to rebuild Iraq, Libya and Yemen and for new investments.

* Completion of construction projects in the Gulf in the lead-up to the planned 2020 World Cup and Expo 2020, as well as the Saudization project whereby companies and enterprises are required to fill up their workforce with Saudi nationals, have all led now to low demand for steel in the region.

These challenges have resulted in the Arab region entering a deflationary phase. But there should be a positive impact with the kick-starting of national projects while continuing to implement lower interest rates with a reduction in gas prices, thus alleviating the pressure on manufacturers.