The Middle East s Evolving Role in the Global Steel Industry Presented to: The Platts 12 th Annual Steel Markets Asia Conference Mumbai India By: George Matta Ezz Steel - Egypt 17 November, 2016
Opening Thoughts The presentation will place the Middle East* steel industry in a global context and examine its historic and current position. We will provide a view on the economic and steel consumption outlook for the region & key countries over the next three years. Given the oil price decline and the demand outlook, it is then necessary to examine the strategic response: What will be the impact on domestic output? What steelmakers will benefit? What about non-regional imports? What has been the strategic response (and are there alternatives)? Based on this analysis, we question whether the Middle East s relative position will evolve *For the purposes of this presentation, the Middle East is defined as: 6 GCC nations, Iran, Iraq, Jordan, Syria, Lebanon 1
Middle Eastern Economic Overview GDP growth is slowing but remains positive despite oil and gas price decline Economic growth is slowing, but is not collapsing and 2016 is forecast to be the lowest point. There are some grounds for optimism: Even as prices fell, output of oil and gas has risen, while GCC nations have diversified and many governments have been willing to shoulder short-term deficits to maintain growth. BUT. % 7 6 5 4 3 2 1 Political conflict in Syria, Iraq and Yemen pose systemic risks to the wider region. Budget deficits are widening and cannot be sustained, which has led to cutbacks 6.1 3.8 3.3 3.2 3.5 GCC GDP 1.6 2.2 2.8 3.2 3 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: World Bank, IMF 2 F/C
The Middle East A global context The recent decline means that rebar demand (the largest single product consumed in the region) has not grown in the last five years. The Middle East is a major rebar market in a global context. It accounts for 6-7% of the global market. In other products, it is lower and is around 3-4% overall. Even after short-term demand weakness, we expect to see growth out to 2025. It will be one of the few regions that will see growth amid a global context of stagnation. Can regional steelmakers benefit from this growth? Historic Global Rebar Demand (m tonnes) 2010 2011 2012 2013 2014 2015 CAGR 2011-15 Middle East 11 21 25 23 23 21 0.0% China 128 149 173 198 201 187 4.6% Other Asia 41 45 47 48 49 50 2.1% NAFTA 10 10 10 11 12 13 5.4% Latin America 9 10 10 11 12 10 0.0% EU28 11 11 10 11 11 11 0.5% Others 38 40 42 31 30 30 (5.4%) Total 248 275 306 333 338 322 3.2% Forecast Rebar Steel demand (m tonnes) 2016 2017 2018 2019 2020 2025 CAGR 2015-25 Middle East 22 21 23 25 26 30 3.6% China 181 174 178 175 173 167-1.1% Other Asia 48 49 51 52 53 58 1.5% NAFTA 13 14 14 14 14 14 0.7% Latin America 11 11 12 12 13 15 4.1% EU28 11 11 12 12 12 13 1.7% Others 24 33 35 45 49 36 1.8% Total 310 313 325 335 340 333 0.3% Source: MBR 3
No Control Over Price or Market Global price is driven by China Despite dismal Middle East demand in 2016, prices jumped sharply higher in the first half before falling and recovering. This is not being driven by changes in regional demand. It is being driven by changes in supply and demand in China. 85-90% of Chinese steel is sold in China and exports are sold at the same price. Chinese demand influences raw material prices and Chinese exports influence global pricing. Many steelmakers (not just Chinese) view the Middle East as a an outlet for excess production. Imports of long products are 6-7m tpy Imports of flat products are higher at 9-11m tpy 550 500 450 400 350 300 250 13000 11000 9000 7000 5000 3000 Rebar Price cfr Dubai ($/tonne) Imports of flat products (000 tonnes) 2012 2013 2014 2015 2016 F/C Sources: MBR ISSB 4
The region Is Import Dependent Imports account for 43% of consumption (2016) Rebar Consumption Flats Consumption Imports 38% Imports 48% Local Production 62% Local Production 52% 22m mt (*) 19.2m mt (*) * 9 months annualized 5
Small and Fragmented Massive excess regional capacity, but small and fragmented to compete Regional crude steel capacity by country Qatar 6% UAE 6% Others Oman 4% 5% KSA 26% 53% Iran 53% 6% Estimated crude capacity of 57m tpy 26% Output of 34.2m tonnes in 2015 Utilisation rate of 60% Source: MBR, Companies 6
State Plays an Outsized Role State ownership is a barrier to development Regional crude steel capacity by ownership Private, 30% State, 70% The state often via national companies such as SABIC, IMIDRO or Qatar steel dominates large-scale steelmaking in the region. While 30% of capacity is nominally private, these tend to be much smaller and (particularly in the case of Iran) operate at low utilisation as they are unable to source capital, and lack access to raw materials. These state owners think nationally (not regionally or globally) and want organic growth rather than consolidation. They are slow to adapt and crowd out private sector investment. Source: MBR, Companies 7
Raw Materials Are a Major Concern Reliance on DRI, but scrap also important Regional crude steel capacity by method of production (2015) BOF 6% Scrap-fed 41% DRI-EAF 53% Part of the reason for state-ownership is the reluctance to give up control of natural gas (to make DRI). The state-owned companies thus have access to gas at subsidised levels. Private-sector producers have struggled to secure natural gas and are more reliant on scrap. The region is scrapshort and they struggle with utilisation rates. This is changing due to budget constraints (gas prices have been raised in KSA and UAE for example in 2016), but is expected to remain a feature. These state owners have also sought to influence scrap by export bans (KSA, Kuwait, Iraq and Jordan) or export taxes. The result is a distorted raw material price environment. Source: MBR 8
So Where Are We Now? and where will we be in the future? The Middle East steel industry has grown due to state development, but this has to a large extent precluded private sector investment. The region remains a net importer of steel with a greater deficit in flat Now products but also in longs (and semis). Due to its import potential, the region is the recipient of excess steel from other markets. It therefore has no control over pricing. What is the outlook for demand? Future What is the outlook for supply? What should the strategic response be? 9
Oil Exporters Under Threat Fiscal balances expected to balloon is it sustainable? Public Sector Budget Surplus/Deficit (% of GDP) Iran Iraq Kuwait Qatar KSA UAE 40 30 20 10 0-10 -20 2014 2015 2016 2017 Not all the countries are in the same position and have different strategic aims: KSA is raising gas prices & cutting subsidies, reducing public sector wages & cutting construction Oman has strategic imperative to diversify and is cutting defence, reducing subsidies, but continuing to spend on infrastructure & diversification Kuwait & Qatar have fewer issues and are continuing to invest (e.g. Kuwait 2020 & World Cup) UAE continuing to spend on infrastructure e.g. Expo 2020 Source: World Bank October 2016 MENA Quarterly Economic Brief 10
Economic Impact on Steel Demand Iran & Saudi are the key markets Iran and KSA are the key regional steel markets KSA: Both are struggling in different ways Others 22% UAE 17% Government has slashed capital expenditure by 20-25% and private sector has followed suit Payments to contractors have been held back, triggering a liquidity crunch. Contractors have pulled back from steel purchasing to Iran 34% Regional Demand (2015) KSA 27% conserve cash, while initially steel mills kept on producing. While demand is weaker, there is also a major inventory correction required in Saudi. This suggests that when the credit crunch eases, there could be a rapid recovery in apparent consumption 11
Impact on Steel Market Production cuts rising imports Year-on-Year Change in Crude Production (%) 30% 20% 10% 0% -10% -20% -30% 2014 2015 2016 Falling demand and prices had an impact on the regional steel market: KSA UAE Iran Middle East Regional output fell more than 5% in 2015 (to m mt) Most affected was Saudi, with output down almost 20% (to m mt) Meltshop closures were seen e.g. Al-Tuwairqi as mills switched to cheap Chinese billet to cope with low prices Despite weakness in demand in 2016, regional output may be flat to slightly higher thanks primarily to Iran, which is exporting its surplus, while Saudi will be down again China supplied around 7.5m tonnes to region in 2015 and similar in 2016. Rising exports from the region notably Iranian semis Chinese Exports to Middle East (000 tonnes) 6000 5000 4000 3000 2000 1000 0 2012 2013 2014 2015 2016 F/C Sources: MBR, Trade Statistics 12
Key Markets Outlook (2016-2018) The worst may be over 15% Apparent Steel Consumption Growth Forecasts (annual % change) 10% 5% 0% 2015 2016 2017 2018-5% -10% -15% Saudi UAE Iran Middle East 2015 2016 2017 2018 Was a tough year Wasn t much better A rebound is possible, but.. More likely in 2018 Source: Ezz Steel estimates, MBR 13
The Strategic Response to Date Protect domestic market Against this background, the most notable strategic response has been protectionism: Iran raised import tariffs on various products over 2015 and 2016. The latest increase came into effect on March 2016 from previous levels of 10-20%. GCC has not made any specific changes, but: Initiated an investigation into the dumping of coated steel into the GCC in June 2016 Increased lobbying for an increase in the general 5% import tariff Some members have sought to exclude Iranian steel from the GCC Iraq, Syria, Lebanon and Yemen have no significant domestic steel industries and therefore have little market protection with customers buying the cheapest product. Chinese increasingly dominate these markets, but could offer an opportunity for regional suppliers to penetrate/supply. Iranian Tariffs: 15% for billet and other semis 20-26% for flat products (lower end for HRC below 2mm) 26% for long products 14
What The Strategic Response Should Be (wishful thinking??) Level the playing field Too often this means protecting the domestic market, but what it should mean in an ideal world is: Allow access to raw materials on commercial and open terms including natural gas and scrap Provide no state actors with preferential treatment e.g. finance Ideally remove the state from the steel industry (e.g. privatisation of Hadeed?) with the state providing the rules Open borders to trade agreements to facilitate larger markets e.g. GCC and regional trade deals Focused market protection: Use trade tools wisely (and quickly) to identify short-term disruptive surges Establish a timetable for removal of external tariffs to facilitate investment and efficiency The result could be: Regional consolidation into larger players fewer, but healthier, and removal of excess capacity Development of regional distribution capability Emergence of regional flat product mill More efficient producers 15
What The Strategic Response Will Probably Be Complain and hope With exception of KSA and Iran, national markets are too small for competitive steelmakers Governments will be unwilling to open their markets or liberalise. If steelmakers remain instruments of state-ownership, they will not break out of their national identity. They will seek protection in their domestic markets from imports, seek to secure reduced input costs as subsidies in return for promises of employment. Blame competitors and lower prices as unfair The result will be: Limited growth outside the public sector, as the private sector lacks access to capital or the subsidies and therefore cannot compete effectively with the state. Public sector mills will struggle with limited growth opportunities in small markets and remain focused on their national market. They will be unable to compete regionally or globally effectively Hope that steel prices/demand increases and volumes are directed away from their market. 16
Thank You