2015 MEED Insight - SOHAR Port and · PDF file6 2015 MEED Insight MIDDLE EAST IRON AND STEEL...

© 2015 MEED Insight © 2015 MEED InsightMIDDLE EAST IRON AND STEEL INDUSTRY 2016 MIDDLE EAST IRON AND STEEL INDUSTRY 20162 3

As one of the world’s fastest growing Port and Freezone developments, our business in SOHAR, Oman includes many sectors of industry and connects us with markets all over the world.

F O R E W O R DAndre Toet, Chief Executive Officer SOHAR Port and Freezone

This is the first in what will become a series of

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in their respective fields that will touch on subjects

that are particularly relevant to SOHAR. To start the

series, we asked MEED Insight to prepare this special

report on the Middle East Iron and Steel Industry.

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GCC Macroeconomic OverviewThe GCC economies have had a good run over the last few decades due to the constant inflow of funds from oil exports. However, recently, these economies have started developing their non-oil sectors through higher spending on infrastructure, health, and education, among others. Trade liberalisation and FDI are also new areas of focus.

The constant fall in US oil imports from GCC, the economic slowdown in Europe, a lull in the refining sector, and reduced demand in China have all resulted in a significant drop in global oil prices, a trend which could continue for some time. While countries such as Saudi Arabia and the UAE have enough foreign exchange reserves and sovereign wealth fund investments to withstand a prolonged decline in oil prices, other GCC economies may find it harder to weather a prolonged down cycle. This will affect government investment plans in non-oil sectors, which are mostly funded by petro-dollars.

While non-oil sectors have helped GCC economies in keeping GDP growth rate above the three percentage mark, oil price declines have drastically pulled down oil GDP growth. After flat y-o-y growth in real GDP in 2014, the GCC region’s GDP growth is expected to decline marginally to 3.4% in 2015 and 3.2% in 2016.

The drop in oil prices is expected to cut GCC’s energy export receipts from $743bn in 2012 to around $410bn in 2015, leading to deficit in fiscal balance for most GCC economies. The consolidated fiscal balance of the GCC region is expected to decline from a surplus of 4.8 percent of GDP in 2014 to a deficit of 7.5 percent of GDP in 2015.

Despite these headwinds, GCC will remain the key driver of growth in the MENA region with the GCC growth outpacing the rest of the MENA economies. Although investments in various projects will continue, the spending would be more selective, with strategic projects gaining priority.

GDP Breakdown

GCC GDP Growth (%) Fiscal balance (% of GDP)

-30-20-10

0102030

UA

E

Sau

di A

rabi

a

Om

an

Qat

ar

Bah

rain

Kuw

ait

Ger

man

y

Chi

na

Japa

n

US

A

2005 2010 2015F

GCC

Source: IMF, MEED Insight Research & Analysis Source: IMF, MEED Insight Research & Analysis

Although GCC economies continue to rely on oil as the main source of export and fiscal revenues, over the years, several policies have been adopted to diversify the economies away from oil

6.45.4 5.4

3.6 3.6 3.4 3.2

0

2

4

6

8

10

12

2010 2011 2012 2013 2014 2015E 2016E

GCC Real GDP Growth (%)

Oil GDP Growth (%)

Non-Oil GDP Growth (%)


GCC Macroeconomic OverviewGCC Macroeconomic Overview

The GCC region has one of the fastest-growing populations in the world, with expatriates dominating the population in most countries. By 2020, the GCC population is forecast to increase to 53 million, with a vast majority under 25 years of age.

Strong population growth, along with the region’s affluence and abundance of natural resources, indicates continued robust market demand, thereby making the GCC region an attractive investment destination for foreign investors. However, the region’s long-term economic growth hinges on the success of efforts made by the governments to educate and employ the rapidly expanding young population.

The rapidly rising population would lead to growth in infrastructure development, with special emphasis in public services, transportation and housing in urban centers. All this growth in infrastructure activity will in turn lead to higher demand for iron and steel.

Saudi Arabia, the largest GCC economy, has been fairly successful in lowering its oil dependency to 43% of GDP in 2014 from 60% in 2007. Manufacturing activity has also grown strongly compared with other growth markets, led by higher non-oil private sector activity. In 2014, GDP growth in Construction (7%), Manufacturing (8%), Hotels (7%), Government (6%) and Transport (6%) mitigated the impact of the meager 1% growth in oil sector GDP.

The UAE, the second-largest GCC economy, has already diversified away its economy from oil to a large extent. The country also boasts of a highly diversified sector portfolio. Many of these sectors have recorded GDP growth numbers: Financial Services (12.5%), Government Services (10.9%), Transport (8%) Wholesale and Retail Trade (5.6%), Construction (7%), Hotels (5.6%) were some of top performing sectors in 2014.

Qatar, the third-largest GCC economy, clocked double-digit growth until 2011, propelled by high gas production and

exports. However, after 2011, the economy slowed down due to a moratorium on further development in the North Field, leading to reduced gas production. Under its 2030 development plan, Qatar has earmarked more than US$200 bn for various infrastructure development projects. The Construction sector recorded the highest growth in 2014 (18.1%), followed by Trade, Restaurants & Hotels (14.3%), Finance (12.3%), Domestic Services (9.2%), and Agriculture and Fishing (8.2%).

Among all GCC economies, Kuwait and Oman have been the most affected by the declining oil prices, with 2014 GDP growth percentage dwindling to 1.3% and 2.9%, respectively. The government is leading investment efforts in Oman as Public & Government sector grew 14.4% in 2014.

Bahrain’s economy has also been impacted by the slump in oil sector. Construction (7.1%), Agriculture (4.2%) and Utilities (4.2%) were among the top performing sectors in 2014.

Demography

Country Overviews

Over the last decade, the GCC region had one of the highest rates of population growth in the world at around four times that in emerging markets and the US, seven times that in China, and 10 times that in the euro zone

While Saudi Arabia is the largest GCC economy, UAE’s economy is more diversified, with lower dependence on government spending, making it more resilient

SAUDI ARABIAGDP: US$ 777.8 bnPopulation: 30.62 MnReal GDP Growth: 3.5% GDP/Capita: USD 25,400 Non-Oil Sector GDP Composition: 57.0%

QATARGDP: US$ 212.0 bnPopulation: 55Real GDP Growth: 6.1% GDP/Capita: USD 94,743Non-Oil Sector GDP Composition: 48.0%

UAEGDP: US$ 416.4 bnPopulation: 9.30 MnReal GDP Growth: 3.6%GDP/Capita: USD 44,770Non-Oil Sector GDP Composition: 68.6%

OMANGDP: US$ 80.5 bnPopulation: 3.71 MnReal GDP Growth: 2.9%GDP/Capita: USD 21,687Non-Oil Sector GDP Composition: 56.0%

BAHRAINGDP: US$ 34.0 bnPopulation: 1.19 MnReal GDP Growth: 4.7%GDP/Capita: USD 28,424Non-Oil Sector GDP Composition: 79.6%

KUWAITGDP: US$ 179.3 bnPopulation: 3.99 MnReal GDP Growth: 1.3% GDP/Capita: USD 44,849Non-Oil Sector GDP Composition: 44.9%

Total Population growth, % (2000–14, cumulative)

Youth population 0–24 years, 2014 (%)

Source: IMF

Source: census.gov

36%

41%

50%

26%

47%

34%

Bahrain

Kuwait

Oman

Qatar

Saudi Arabia

United Arab Emirates

0%20%40%60%80%100%

0%50%

100%150%200%250%300%

Qat

arU

AE

Kuw

ait

Bah

rain

Om

anS

audi

Ara

bia

Sou

th A

fric

aIn

dia

Bra

zil

US

Chi

naG

erm

any

Total Population Growth Percentage (%)Expatriates as % of Total Population (RHS)

GCC

Source: IMF, MEED Insight Research & Analysis All data pertains to 2014


Global Iron and Steel Global Iron and Steel

Over the last century, global steel industry has witnessed three rapid growth phases: 1) the growth of the US economy in the early 20th century, 2) the reconstruction and development period following the Second World War, and 3) the currently ongoing rapid growth phase of China. The Chinese growth juggernaut which started rolling in the early 1990s made it the driver of the global steel industry, with ~50% of production and 46% of consumption emanating form China alone.

This rapid growth in China, however, having reached its peak, the iron and steel demand from the country is now getting muted. This has dealt a severe blow to the global steel industry, resulting in overcapacity. Industry experts believe that the system has close to 300 million tonnes of overcapacity, resulting in the Chinese government having mandated the removal of 80 million tonnes of capacity.

However, certain regional exceptions do exist as infrastructure developments in countries such as India and regions including the MENA and Latin America are expected to spur steel demand in these regions.

In terms of crude mine production, China is the largest iron ore producer in the world. However, the Fe (or actual iron) content of the iron ore produced in China is only 17–20%, much lower than the global standard of 62%. Therefore, in comparable terms, Australia (609 million tonnes) tops the list of iron ore producing countries, followed by Brazil (317 million tonnes).

Huge demand from China during the last decade shot up the iron ore prices, enticing several mining companies to increase their production levels. However, as the Chinese growth engine mellowed, the global iron ore market also started experiencing a slowdown, especially in 2012. Production recovered slightly in 2013, rising 3.5% during the year to 1,929 million tonnes. In the near future, the iron ore industry is expected to exhibit low single-digit growth rates.

Regulatory issues, especially in emerging nations, could pose another threat to the global iron ore industry. For instance, India, the fourth-largest iron ore producer, faced some issues concerning legality of mining grants and environmental concern, which wreaked havoc on the country’s mining industry in 2014.

Industry Overview Iron Ore ProductionWorld Crude Steel Statistics 2008–14 (Tonnes, mn)

Global Iron Ore & Pig Iron Production (Tonnes, mn)

Iron ore production by region (2013)

Global Iron ore Statistics (2014)(Tonnes, Mn)

Source: World Steel Association


2 Japan110.71 China

822.7

3 USA88.2

4 India86.5

6 Russia71.5

5 S. Korea71.5

7 Germany42.9

8 Turkey34.0

Ukraine27.2

9 Brazil33.9

10

Italy23.711

12 Taiwan23.181.2

13 Mexico19.0

15 France16.1

14 Iran16.3

Top 15 Steel Producing countries (Tonnes, mn)

The global steel industry is exiting from a major growth phase, resulting in a situation of global over-capacity


China accounts for more than two-thirds of the global iron ore imports and produces as much steel as the rest of the world combined

1670 17

66 1885 19

82 2095

2164

2241

1343

1238 14

33 1537

1559 1649

1665

1226

1151 13

08 1412

1439 15

28

1537

0

500

1,000

1,500

2,000

2,500

2008 2009 2010 2011 2012 2013 2014

Capacity Production

1,58

0 1,85

4

1,91

9

1,87

0

1,92

9

934 1,03

5

1,10

5

1,12

4

1,16

8

0

500

1,000

1,500

2,000

2,500

2009 2010 2011 2012 2013

Iron Ore Pig Iron

2,201

1,404

930

Global production Global importsChinese imports

32%

23%

21%

11%

6%

4%2% 2%

1% Oceania

Asia

South America

C.I.S.

North America

Africa

Middle East

European Union

Other Europe

Source: World Steel AssociationSource: woodmac.com


Global Iron and Steel

China, accounting for 46% of the global steel usage, dominates the global steel industry, with the US at a distant second with 7% share of the total consumption.

Among the top 10 steel consuming countries, India is the only country which is expected to witness high single-digit growth rate in 2015F and 2016F, while South Korea, Germany, Mexico and Turkey are forecast to witness low single-digit growth in steel demand.

Sector-wise, the construction sector is the major consumer of steel globally, followed by transport (automobiles, railways, etc).

Urbanisation and growing middle class continue to be the major drivers of steel demand from the construction and real estate sector, with Asia’s construction market accounting for close to 40% of the total construction spending in 2013. In automobiles, steel accounts for ~70% of the material used, and with most of the global auto OEMs now setting up shops in emerging markets such as China, India, and Brazil, there will be steady demand from this sector both in emerging as well as developed markets.

Steel Consumption Global Steel Consumption by Sector

Source: OECD Steel Committee Meeting, 2010

Top 20 Steel Consuming Countries – 2014 (Million Tonnes)

CANADA15.2

USA106.9

MEXICO22.5

BRAZIL24.6

TURKEY30.7

UNITED KINGOM

9.6

EGYPT10.2

SPAIN10.8

FRANCE12.5

GERMANY39.2

POLAND12.2

AUSTRALIA & NEW ZEALAND7.4

RUSSIA43.1

CHINA710.8

SOUTH KOREA55.4

JAPAN67.5

TAIWAN, CHINA19.6

2

5

4

3INDIA

75.3

121

6

20

7

16

8

IRAN17.3

13

17

15

19

18

ITALY22.1

11

14

10

9

While the slowdown in China will have a southwards pull, high consumption in India and some MENA and ASEAN countries will keep demand ticking, albeit at very low rates`

Construction and Real

Estate50%

Transport16%

Machinery14%

Metal Products

14%

Domestic Appliances

3%

Electrical Equipment

3%


MENA Iron and Steel

Crude Steel Production

MENA - Total Production of Crude Steel (’000 tonnes)


Historically, Iran and Egypt have been the main steel production hubs in the MENA region. But the rapid development in GCC countries, especially high infrastructure spending, is resulting in huge steel demand from these economies. This has resulted in many new steel plants being set as well as expansion plans and joint ventures coming into existence in the steel sector in the GCC countries, especially Saudi Arabia, Qatar and the UAE.

Saudi Arabia and the UAE are the key crude steel producers in the GCC region, together accounting for about 75% of the total crude steel production in the GCC during 2014. The UAE is the second-largest producer, behind Saudi Arabia, and is expanding capacity rapidly. From just 0.5 million tonnes in 2010, the country increased its production to about 2.4 million tonnes by 2014.

Saudi Arabia was one of the early movers in the GCC, with Saudi Iron & Steel Company, the first fully integrated steel producer in the country, starting production in 1983. Currently

producing close to 6 million tonnes, the company plans to reach an output capacity of 10 million tonnes by 2025.

The largest steel plant in the UAE is Emirates Steel Industries (ESI). Established in 1998 to meet the growing demand for quality steel products for the UAE’s fast developing construction sector, ESI is the only significant domestic supplier of deformed reinforcing steel bars. Following two expansions involving an investment of AED 11 bn (US$ 3 bn) in 2012, ESI now has a total capacity of 3.5 million tonnes per annum.

In recognition of all the infrastructure and real estate development in the GCC region, investments are pouring in to bolster regional steelmaking capacity. In 2015, GCC will have the capacity to produce 18 million metric tonnes per year of rebar, 3 million mt/y of wire rod, and 3 million mt/y of structural sections. The governments in the GCC countries are also providing various incentives to foreign investors in the manufacturing sector, including low or nil corporate tax, full repatriation of capital and profits to stimulate steel production.

Huge infrastructure spending in the Middle East is driving strong demand for steel and fuelling investment in steel projects

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

Iran Egypt Qatar Saudi Arabia UAE

2010 2014

CAGR47.9%

CAGR5.8%

CAGR11.5%

CAGR-0.7%

CAGR8.0%

GCC**Only Include countries producing more than 500 thousand tonnes


GCC Iron and Steel

As the GCC countries take active measures towards diversifying their economies, more investments will flow into sectors such as infrastructure, construction, real estate, and hotels. This would drive demand for steel. As a result of huge construction and infrastructure spending, the per capita value of the GCC’s construction industry will increase from $2,045 in 2014 to $3,256 in 2020, dwarfing even China’s per capita value of $473 in 2014 and $680 in 2020.

As of 2013, Saudi Arabia (total usage 13.700 million tonnes), the UAE (7.859 million tonnes) and Qatar (2.182 million tonnes) were the major steel consumers in the GCC region. GCC countries are expected to remain major consumers of steel products going forward as they continue to invest heavily in various sectors to boost their diversification efforts.

Steel Consumption

Apparent Steel Use (Consumption) (Crude Steel Equivalent – MT)



The continuing construction boom, major real estate investments have led to a rapid increase in the demand for steel in the GCC region

0

5

10

15

20

25

30

2009 2010 2011 2012 2013

Saudi Arabia UAE QatarKuwait Oman Bahrain

2013(GCC Total): 26,8 (Million tonnes)

Apparent Steel Use Per Capita 2013

467.3

• Saudi Iron & Steel Co• Shaaban Steel Co• United Sulb Company

957.5

• Emirates Steel• Conares• Hamriyah Steel

1,103.9

• Qatar Steel Company• BSI Steel

Top Steel Producing Companies

472.3

Not a major steel producer

473.9


177.5


(kg crude steel)

Saudi Arabia

UAE

Oman

Kuwait

Qatar

Bahrain

227

751

971

1,264

4,342

4,669

340

407

845

1,037

3,792

5,999

276

859

1,038

3,956

7,847

373

920

910

4,723

6,122

Bahrain

Qatar

Kuwait

Oman

UAE

Saudi Arabia

2011 2012 2013 2014

Global Iron and Steel

About 40% of The GCC’s steel demand is met locally, while the rest is imported mainly from Turkey, Ukraine, the EU, Russia and China.

Chinese steel imports are a major concern for the local GCC steelmakers. As China’s domestic construction industry is gradually slowing down, more Chinese steel exports are flooding global markets. Chinese exports to the UAE grew by 63% from 2013 to 2014. A similar increase was estimated for exports to the GCC and the wider Arab region. Imports of Chinese billets into the UAE rose 300% in 2014 against 2013, while Chinese wire rod imports surged nearly 112% in the same period. This does not bode well for the domestic steel manufacturers who are highly affected by this dumping. The UAE steel industry captains opine that lack of customs protection in the UAE has led to this problem, which could get worse if stronger anti-dumping policies are not put in place.

Saudi Arabia is highly import oriented as more than half of the steel consumption in the country is met through imports. However, a major portion of these imports is formed by steel scrap, which is used as a raw material by the country’s steel producers.

Imports Scenario GCC Iron and Steel Imports (USD Million)

Source: Saudigazette

China is the largest exporter of steel to GCC, followed by Eastern European and CIS countries

Saudi Arabia

UAE

Oman

Kuwait

Qatar

Bahrain


GCC Iron & Steel As per MEED database, total value of infrastructure and capital projects planned in the GCC in 2015 $172bn, the highest on record to date. Despite the backdrop of falling oil prices, infrastructure development is gaining pace due to the rising focus on diversification, driven by the rising youth population in the GCC; 50% of the GCC population is under 25 years of age. Currently, projects worth about $2.8 tn are in the execution and pre-execution phase, of which 40% relate to residential, leisure and hospitality buildings and mixed-use developments.

Projects in key economies maintaining momentum for Iron and Steel industry

Saudi Arabia: Saudi Arabia has seen the largest number of projects in the GCC since 2009. The government’s strategy to increase public expenditure, particularly in housing, education and healthcare projects, has led to a constant flow of contract awards. Based on the pipeline of announced

projects, the largest share of projects by value will be held by the Mecca Province (37%), followed by the Eastern Province (18%). Riyadh has the largest share of commercial and water projects, while Mecca has the largest share of industrial, residential and transportation projects.

UAE: While the global financial crisis and the real estate crisis in Dubai brought the projects market to a near standstill in 2009–10, signs of a recovery were seen in 2013–14, reinforced by Dubai’s successful bid to host the Expo 2020, announced in November 2013. In the run up to the Expo 2020, large-scale investments in infrastructure, hospitality and commercial projects are likely to spur steel demand.

Qatar: The country is investing in railroads as it plans to host the 2022 FIFA World Cup. In Qatar, the two largest projects in the pre-execution phase and expected to be awarded in 2015 are from QRail ($15 bn) and from QIRP, whose Passenger & Freight Rail: Phase 2 is budgeted at US$3 bn.

GDP Breakdown

Source: MEED Insight Research & Analysis Source: MEED Insight Research & Analysis

Steel consumption in the region has increased considerably buoyed by construction boom, growing investment in the real estate sector and rapid infrastructure developments

Value of Project Awards in GCC Economies 2008–21 (US$ bn)

Expected Raw Materials Consumption in projects

799705

363235

15838

0

200

400

600

800

1,000

KSA UAE Qatar Kuwait Oman Bahrain

Project include both ongoing and upcoming projects

Interiors52%

Steel8%

Cement9%

Others31%

Total Raw Materials Expected to be Used –$358 bn

GCC Iron & Steel Demand Drivers Investments in Infrastructure…2/2

Source: MEED Insight Research & Analysis

The construction sector is the project magnet of the GCC region, followed by the transport sector, where railways and airport investments are major project drivers

Value of Project Awards in GCC Economies by Sector, 2008–21 ($bn)

Major projects to boosts GCC steel demand

19

370

44 2092

4697

17

UAE ($705 bn)

54

275

35 40 49

122

191

33

KSA ($799 bn)

2

147

14 5 15 20

137

23

Qatar ($363 bn)

13

31

20

1118 16

38

11

Oman ($ 158 bn)

1

66

22

1

61

3141

12

Kuwait ($235 bn)

1

17

13 3

6 52

Bahrain ($38 bn)

04080120160 Column1Chemical Construction Gas Industrial Oil Power Transport Water

UAE USD bn

DWC: Al Maktoum International Airportexpansion

32.0

Tacaamol - Al-Gharbia Chemicals Industrial City

20.0

MBR City: DubaiCreek Harbour

17.7

KSA USD bn

Al Mozaini - Riyadh East Sub Center

15.0

Khozam Development 13.3

Mecca Metro: LinesB and C

8.0

Qatar USD bn

QIRP: Passenger & Freight Rail

15.0

Qatar Economic Zone 3.0

Occidental Petroleum Corporation (Oxy) –Idd-e-Shargi North Dome Expansion Phase

3.0


GCC Iron and Steel Demand Drivers

Automobiles

High disposable income of individuals in GCC make this region a major consumer of cars and trucks, most of which are all currently imported. For example, Saudi residents are expected to buy up to one million cars a year by 2020.

Against the backdrop of this strong demand, GCC economies have planned major automobile plant developments. In Saudi Arabia, the Saudi Malaysian Industrial Development Holding Company has invested $2bn for a new plant at Damman, for the manufacture of a locally processed car named Meeya while Daewoo International is planning to set up a factory in Sudair which will produce 150,000 cars. In the UAE, Abu Dhabi’s government has initiated the development of The Auto City in the Mussafah area; this city would house a cluster of advanced workshops and service centers.

Steel, accounting for nearly 70% of the raw material requirement in passenger cars, would witness significantly higher demand in the GCC for the development of the automobile sector in the GCC.

Railway

Until recently, most of the trade logistics requirements of the GCC region were met through ports, whereas passenger traffic was managed through the road network. Rail network, while existent, does not yet have a wide coverage. However, as economies develop, the need for a proper railway infrastructure is increasing. Also, maritime piracy and threats of closure of the Hormuz Strait further point towards the need for an effective rail infrastructure, which can connect all the member countries of GCC internally as well as to other Middle Eastern countries.

The GCC governments are consequently embarking on ambitious rail network expansion plans. For example, Dubai Metro Project, which was conceived and executed in a short span, triggered a series of similar projects in the Gulf. The most ambitious railway project among these, spanning all six GCC nations, is the GCC Railway Network, slated to be operational by 2020.

With almost every component in rail infrastructure being made of steel, the development of rail infrastructure in GCC will result in a huge demand for the output of GCC steel plants


Booming automobile demand and rapid development in railway infrastructure in GCC would boost demand for Iron and Steel



Petrochemicals

GCC has planned various projects to become the global petrochemical hub by 2020 including Yanbu Integrated Refinery and Petrochemical Complex ($20bn), Sadara Petrochemical Complex ($10bn joint venture of Saudi Aramco and Dow Chemical Company), Petro Rabigh Phase II ($7bn joint venture of Saudi Aramco and Sumitomo Chemicals), and Ras Laffan Olefin Complex ($6bn), among others.

Demand emanating from the development of new pipeline networks is leading to higher demand for iron and steel. As of 2013, GCC accounted for 34% of the global demand for pipes, with new GCC pipeline networks estimated to require over 5.3 million tonnes (US$ 7.2 bn) of steel pipes over the next five years (2017).

Real Estate

The real estate market in the Middle East is slated for solid growth, mostly due to rapidly rising population, nuclear family set up, and higher levels of disposable income. The resulting demand for new homes is driving demand for steel.

The most prominent among the GCC real estate markets is Dubai, which had a solid run during 2005–09. However, the global financial crisis brought this market to a standstill. Fortunately, the market has now emerged from the lows, and Dubai is outperforming real estate markets around the world. Similarly, in Saudi Arabia, Riyadh’s real estate market has been showing healthy signs of growth in residential and retail real estate segments. A booming real estate market augurs well for the iron and steel industry as rising real estate construction will drive the demand for iron and steel.

Construction – Economic and Industrial Cities

GCC is expected to witness exponential growth in its economic and industrial cities by 2020. Several large-scale projects are either planned or underway, including Saudi Arabia’s King Abdullah Economic City ($93bn investment), Sudair Industrial City ($40bn), Jizan Economic City ($27bn), Ras Al Khair Industrial Complex ($30bn), Industrial cities of Abu Dhabi (ICAD I, II & III). The iron and steel industry will witness huge demands from these projects.

Key industries that will drive steel demand…2/2

Healthy growth in real estate, a slew of oil and gas projects, and the development of industrial and economic cities in GCC economies will generate a significant demand for iron and steel


Low Energy Cost

In steel making, energy costs constitute up to 40% of the final finished goods, making the availability of low cost energy a vital factor to the success of a region’s steel sector.

GCC member countries control 42% of the world’s proven oil reserves and 25% of proven natural gas reserves. Natural gas prices in GCC region ranges $0.8–1.5 per million British thermal units (mmbtu), much lower than the global average of $4–6 per mmbtu. This has helped this region to make gas-based direct-reduced iron (DRI) as the major raw material source for steel production.

GCC also offers quality electric power at the cheapest tariff in the world (US cents 3.2/kWh in Saudi Arabia, US cents 3.8/kWh GCC average, US cents 8.5/kWh global average). This makes GCC an ideal location for setting up electric arc furnace (EAF) steel plants. An additional benefit of the EAF process of steel-making is that it is less capital intensive as compared to the conventional steelmaking technology based on blast furnace – basic oxygen furnace (BF-BOF).

Key industries that will drive steel demand…3/3

GCC offers substantial cost advantage for industries such as petrochemicals, fertilizers, pharmaceuticals and metallurgy as the region has among the lowest energy costs globally due to the abundant availability of energy resources


The continuing construction boom, major real estate investments and rising per capita in-come have led to a rapid increase in steel demand

Slump in oil prices is one the major concerns affecting the GCC economy, which in turn could deal a severe blow to the developing steel industry

While Saudi Arabia is still the largest steel producer in GCC, several new steel plants are being set up in the UAE amid rapid development of the sector in the country. Many of these new plants (and expansions) are eyeing both the domestic as well as export markets

Trends in GCC Iron and Steel

The GCC presents substantial cost advantages for industries such as petrochemicals, fertilizers, pharmaceuticals and metallurgy, among others, as it boasts of one of the lowest energy costs globally due to the abundant availability of energy resources.

Saudi Arabia, Qatar and the UAE have all witnessed growth in the iron and steel industry over the last few years. The UAE, in particular, has outpaced its peers, clocking a CAGR of 48% in the five years from over 2010 to 2014.

High spending on infrastructure development and growth in the construction sector have been the major demand drivers for the GCC iron and steel sector, especially the steel tube industry.

Increasing Demand Driving GCC to Expand Steel Production Capacity

Most of the steel produced in the GCC is for internal consumption only as it is gradually reducing its dependence on imported iron and steel. Both Saudi Arabia and the UAE, the two major steel consuming countries in GCC, have reduced their steel import over the 2010–14 period.

The Gulf region has become a hub for scrap metal recycling, with the UAE and Saudi Arabia as the main centres of activity. The UAE is ideally placed, geographically, to import scrap from Africa and Europe, refine or sort it, and re-export it within the region as well as to China, India and Pakistan.

Inhibitors

Decline in oil prices likely to affect steel and construction industries

A constant decline in US oil imports from the GCC region, the economic slowdown in Europe, a lull in the refining sector, lower demand from China, and most important of all, inaction on part of the OPEC to lower production output as a countermeasure have resulted in a significant drop in global oil prices.

This has raised concerns for the GCC economy as the oil and gas industry is the major contributor to the GCC’s GDP. A decline in oil prices might affect the iron and steel sector as investors might be reluctant to invest in new projects while the economy is stuttering.

Major Challenges to GCC’s Domestic Iron and Steel Manufactures

Saudi Arabia, the fastest-growing construction market in the GCC and accounting for 40% of all projects, may be affected severely by this downturn as a large portion of its construction funding is derived from the government, which depends on revenues from oil exports.

Cheaper ImportsCheaper imports in the GCC region, especially cheap steel from China, is significantly reducing the growth opportunities for local steel producers. Low Chinese prices are making manufacturing in GCC unviable to compete. UAE, which does not have strong anti-dumping policies, is particularly affected by this trend. However many industry experts believe that the situation will improve by mid 2016, as Chinese inventory will erode.

Steel producers’ current state, wherein the accumulated Chinese inventory is being traded and thereby affecting the steel business, is likely to last for another 3–4 months. Such cyclic changes keep occurring in the steel sector at regular intervals, such as the one in 2008–2009. We believe the situation is likely to improve from February/March 2016.

- G N Khadse, CEO SOHAR Steel

“ “


Opportunity Assessment in the GCC (1/5)

Aggressive investments in non-oil sectors by the GCC governments as a measure to reduce dependence on oil have resulted in a constant flow of projects. Investments in construction, real estate, automobiles, rail infrastructure, etc. will drive iron and steel demand in the GCC region over the next decade.

While the overall growth trend in the GCC projects market space has remained intact, since 2009 incidents like the global financial crisis, the gradual Chinese slowdown, and the slump in oil prices have somewhat taken out the steam from the GCC growth engine. Consequently, economies and sectors depending heavily on government funding might have some pain in store, as oil export revenues remain muted.

That said, the GCC economies continue with their investments in various projects. While stronger economies like Saudi Arabia, the UAE and Qatar would be go ahead full steam on their project plans, smaller ones like Oman and Bahrain might be a bit more selective.

Projects Overview

Project Awards Breakdown by Sector, 2008–21

Project Awards Breakdown by Country, 2008–21

Value of Contract Awards by Year, 2008–21 ($bn)




GCC will continue to attracts projects as the economies continue to takes active measures to lower dependence on revenues from oil

38%

20%

13%

11%

6%4%4%4%

41%

24%

8%

10%

6%4%

3%4%

ConstructionTransportPowerOilGasWaterIndustrialChemical

2008–142015–21

126 15

0

137

135

119

160 17

9

150 16

1 173 18

8 200 209

216

0255075

100125150175200225250

2008

2009

2010

2011

2012

2013

2014

2015

e

2016

f

2017

f

2018

f

2019

f

2020

f

2021

f

39%

32%

13%

8%6%2%

31%

29%

18%

12%

8% 2%Saudi Arabia

UAE

Qatar

Kuwait

Oman

Bahrain

2008-20142015-2021

2008-14: $1.0 tn2015-21: $1.3 tn


A well-developed logistics sector is essential for all the on-going and up-coming projects in the GCC to be executed smoothly. Accordingly, rail, airport and port infrastructure development has been a key focus area in the GCC.

Ports are the major conduits through which the bulk of the international movement of iron and steel takes place. In recent years, many major ports have been developed in the GCC, especially due to the establishment of several Special Economic Zones (SEZs) in the region to promote trade. For example, within the UAE, the Jebel Ali Port has grown significantly over the last few years, leveraging the Dubai Free Zone. Traditionally, the Jebel Ali Port has been the main port of the GCC region, ranked 9th globally (on the basis of volume) by the World Shipping Council (2013).

Ports – The Oman Advantage

Similarly, in Oman, SOHAR Port has benefitted significantly from the SOHAR Freezone, while Salalah Port receives a lot of traffic from the Salalah Free Zone. The strategic location of the Omani ports outside the Strait of Hormuz is one of its key USPs. With the available and upcoming multi-modal infrastructure, traders and shipping lines have the advantage to serve their customers without having to enter the gulf.

Apart from Oman’s strategic location favouring its ports, the economy has been particularly aggressive in weaning off its dependence on oil as it has one of the lowest oil reserves among all GCC economies. The ‘Sultanate of Oman Logistics Strategy 2040’ highlights the logistics sector as one of its focus areas, with the main goal of increasing the contribution of logistics to GDP and creation of quality jobs. Heavy investments in infrastructure and logistics are being made, especially in the maritime clusters of SOHAR, Duqm and Salalah.

Indian Ocean

3

2

4

1

2

3

4

Sohar

Muscat

Duqm

Salalah

SaudiArabiaBahrain

Oman

UAE1

Kuwait

Qatar

As GCC continue to grow so does it dependence on its ports, Oman plays a key role in the region




Oman has successfully built a competitive and low-cost economy, in terms of production of goods and services, where both energy and labour costs are lower. The country is emphasising on increasing levels of non-oil activity, with the Vision 2020 long-term development plan, and aiming to boost private sector participation. Moreover, its efforts to build both physical infrastructure and human capital are fuelling the growth.

Oman’s diversification efforts are helping it become an important member of the global trade. Its total trade increased at a CAGR of 9.2% during 2011-14. Oman became a part of the international trade with inclusion in the WTO in 2000. Since then the country has entered into various agreements facilitating trade. It signed a free-trade agreement with the US in 2006, which came into effect in 2009, with the primary focus on:• Eliminating most tariff and non-tariff barriers

• Expediting the movement of goods and provision of services

• Strengthening protection for investors

• Safeguarding intellectual property rights, labour and environmental standards

Apart from a separate FTA with the US, Oman has signed other FTAs with the country as a part of the GCC countries.

Oman’s external trade is dominated by oil exports (83% of total exports), primarily fulfilling the energy need of Asian countries, especially China. However, as the country is progressing to make infrastructure investments and modernise, the ratio of imports to total external trade is increasing. Between 2010 and 2013, total exports in Oman increased by 15% while imports rose by 20%. The year 2014 witnessed decline in trade, primarily due to the decline in oil prices.

Oman – Gearing up for Growth

While recent oil declines did affect the overall Oman economy, the steady investments in infrastructure, logistics and various downstream sectors will create a more balanced economy

Oman -Total External Trade (US$ bn)

Top Export Destinations 2014

Oman Free Trade Agreements

36.6

47.1 52.1 55.5

50.7

19.8 23.6 28.1

34.3 29.3

2010 2011 2012 2013 2014

Export Import

Import Countries: 120 Export Countries: 141

Products Imported: 4,153

Products Exported: 1,121

China, 44.1%

Korea, Rep., 14.8%

Other Asia, nes,

7.5%

Japan, 7.2%

UAE, 4.0%

Rest of World, 22.5%

Source: World Integrated Trade Solution (WITS); MEED Insight Research & Analysis

As part of GCC

Signed free trade agreements with Syria(2005), Singapore (2008) and EFTA (2009)

As part of GCC

Planning to establish with Australia, China, Mercosur, Japan, Jordan, Korea, Turkey, New Zealand, India, Iran, ASEAN

Individually USA (2006)


Oman is gearing up to take advantage of its favourable geographic position by heavily investing in infrastructure, and Port of SOHAR is at the centre of its plans. The significant investment in railway infrastructure integrating various ports with the entire country is a major boost for Oman’s ports. The ports would now be directly connected to different parts of the country as well as to other major GCC economies such as the UAE and Saudi Arabia, totally bypassing the Strait of Hormuz.

Moreover, a major dual-carriageway link road is being constructed in Oman and Saudi Arabia linking Ibri and Haradh-Batha road. This combined road network will reduce distance by more than 500 kilometres and will serve a key connector between Riyadh and SOHAR, further increasing the viability of doing business through the Port of SOHAR.

Apart from its direct connectivity with Saudi Arabia and the UAE, the Port of SOHAR emerges as a value-for-money proposition particularly for exporters/importers when compared with some of the other ports in the region. It has one of the lowest operating costs.

Both lower costs and better connectivity to the UAE and Saudi Arabia, two biggest producers and consumers of Iron and Steel, place Port of SOHAR in an ideal situation to facilitate the Iron and Steel trade in the region.

Port of SOHAR – Providing opportunities

SOHAR Port, a deep-sea port in the Sultanate of Oman, not only boasts of direct connectivity with the UAE and Saudi Arabia but also provides a low-cost operating environment

� Ownership: 100% foreign ownership forFreezone tenants

Port of SOHAR - Key Characteristics

� Major Clusters

� Logistics

� Petrochemicals

� Metals

SOHAR Jebel Ali DWC Hamriyah KIZAD RAK

Power (USD / kWh) 0.04 0.09 0.09 0.12 0.04 0.11

Open land (USD / sq m) 7.00 5.44 - 21.78 5.44 - 10.98 6.81 - 10.89 2.72 - 6.81 9.53 - 13.61

Registration FZ company (USD) 2,700 – 4,100 4,100 Free 2,500 1,400 1,900

General trade license (USD) 7,800 8,200 NA 3,300 1,400 4,100

� Imports: Duty-free imports in the Freezone

� Capital Requirements: Low capital requirements, with OMR 20,000 required to set up a company in the Freezone

� Cost of living: Lower cost of living compared with that in the UAE


10% 2%

3%9%

3%3%4%

66%

European Union (28)

Other Europe

CIS

NAFTA

Central and South America

Africa

Middle East

Asia and Oceania


While global iron and steel consumption has slowed down quite bit compared to its highs over the last decade, the Middle East region will continue to exhibit decent consumption growth at 2.8% (est.) in 2015 moving up to 4.2% (est.) in 2016. The only region which is expected to outperform the Middle East are its neighboring African countries.

This augurs well for the iron and steel sector in the GCC region, which has been growing steadily especially on the back of various projects in construction, transport and infrastructure.

There may be some concerns if the oil price decline gets prolonged as that could hamper long term investment plans, especially in the weaker economies. But as of now, the GCC iron and steel sector will continue to show strong growth on the back of a firm demand.

Port of SOHAR – Providing opportunities

The MENA region will continue to witness one of the highest demands for iron and steel vis-à-vis, keeping the outlook positive at least in the near term``

NAFTA2015 2016143

Tonnes mn

145 Tonnes

mn

-0.9%

1.3%

CENTRAL and SOUTH AMERICA

2015 201646

Tonnes mn

48 Tonnes

mn

-3.4%

3.4%

CIS2015 2016

52 Tonnes

mn

52 Tonnes

mn

-7.3%

-0.3%

EUROPEAN UNION (28)

2015 2016150

Tonnes mn

154 Tonnes

mn

2.1% 2.8%

OTHER EUROPE2015 2016

38 Tonnes mn

39 Tonnes mn

ASIA and OCEANIA2015 20161,021

Tonnes mn

1,030 Tonnes

mn

0.6%0.9%

MIDDLE EAST2015 2016

53 Tonnes mn

56 Tonnes mn

2.8%4.2%

AFRICA2015 2016

40 Tonnes

mn

42 Tonnes

mn

7.4%4.9%

WORLD2015 20161,544

Tonnes mn

1,565 Tonnes

mn

0.5%1.4%

2.8%1.4%


Share of Apparent Steel Usage by region in 2016, %

About MEED Insight

MEED Insight is the consulting arm of the MEED business. It provides bespoke market research, business plans, feasibility studies and corporate strategy development studies to help our clients make more profitable and informed business decisions. MEED Insight has access to a wealth of regional information ranging from broad macroeconomic statistics to specific sector data to help its clients accurately and cost effectively forecast market growth and trends.

MEED Insight has a particular focus on project-related market data thanks to its proprietary database of projects in the region, MEED Projects. Thanks to the respected MEED name and magazine, MEED Insight consultants have considerable access to the market, enabling them to speak directly to clients, consultants, government ministries and other companies

About SOHAR

SOHAR Port and Freezone is a deep sea port and free zone in the Middle East, situated in the Sultanate of Oman around 200 kilometres northwest of its capital Muscat. With current investments exceeding US$21 billion, it is one of the world’s fastest growing port and free zone developments and lies at the centre of global trade routes between Europe and Asia. SOHAR provides unequalled access to booming Gulf economies while avoiding the additional costs of passing through the Strait of Hormuz.

The existing road network and airport and the future rail system provide direct connectivity to the UAE and Saudi Arabia, as well as to the rest of the world. Equipped with deep-water jetties capable of handling the world’s largest ships, SOHAR has leading global partners that operate its container, dry bulk, liquid and gas terminals including Hutchison Whampoa, C. Steinweg Oman, Oiltanking Odfjell and Svitzer. The metals cluster in SOHAR includes international companies from India, Brazil, UK, China and Oman.

SOHAR Port and Freezone is managed by SOHAR Industrial Port Company (SIPC), a joint venture between the Port of Rotterdam and the Sultanate of Oman.

Find out more at: www.soharportandfreezone.com

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