An expected rise in scrap steel will boost the competitiveness of Egyptian steelmakers, which rely on direct reduced iron (DRI) for feedstock, but the latest Egypt Metals Report warns that surging growth in Saudi steelmaking could hinder export growth in the medium term.

In Q110, Egyptian crude steel output grew 11.3% year-on-year (y-o-y) to 1.45mn tons. However, the quarter-on-quarter (q-o-q) rate of growth had slowed to just 0.7%, compared with 2.9% in Q410. Having reached a monthly level of output of 517,000 tons in December 2009 - indicating that the industry was operating at pre-crisis levels - production fell back to an average of 485,000 tons in Q110. Nevertheless, compared with the steel industry worldwide, Egypt is faring relatively well. Steel price stabilisation in H210 to lead to a recovery in local demand, but price volatility in longs products suggests that producers will find the going tough over the short-term.

The country has been operating well under full capacity, with a utilisation rate of just 65% of its full 8.8mn tons per annum (tpa) potential. Even without further expansion of capacity, Egypt has the potential to grow by over 50% using plants currently in operation. The industry is highly vulnerable to lower-cost production from elsewhere flooding the market.

The ability of local producers to achieve sustained production requires higher steel prices. In Q2-10, the price of steel imported from Turkey, Poland and the CIS was up to 5% lower than domestically-produced steel, leading to sharp drops in local production. Local producers predominantly use DRI with iron ore supplies' prices tied to longer-term contracts. Manufacturers whose main input was scrap, like Turkish importers, have been able to adapt their production process in shorter periods and react more quickly to fluctuations in input prices, transferring cost reductions to their customers and gaining market share. While this benefited those foreign plants that used scrap as feedstock during the recession when it was cheap, the economic recovery will start to benefit local producers. As of April 2010, Ezz Steel claimed that iron prices were EGP300 per ton cheaper than neighbouring countries, despite large hikes. Consequently, Egypt will be able to leverage a cost advantage over H210 and into 2011. The report expects crude output to grow 22% to 6.44mn tons, almost the same level as 2008.

Thereafter, annual output growth should continue to be sustained at 10-14%, with 2014 volumes set to exceed 10mn tons. Although this represents a 95% increase over 2009 estimates, it will still not be enough to cover domestic demand, which is set to grow by nearly 70% to around 12.43mn tons in 2014.

A significant threat is the surge in steelmaking capacity in Saudi Arabia, which saw its steel output rise by 41.6% y-o-y and 9.9% q-o-q to 1.33mn tons in Q110. The rapid increase in Saudi ouput has contributed to the 14.4% growth in Middle East production, which is outpacing consumption; we forecast 10% growth in Middle East consumption in 2010. While Saudi Arabia continued to require rebar imports to satisfy demand from the construction sector in H110, traders suspended import purchases while they waited for the cancellation of a 5% import duty on steel products. This helped depress Egyptian exports, although we expect the situation to improve in H210 as Saudi traders resume purchases. Egyptian steel is heavily influenced by developments in the Middle East and the expanding role of the Saudi steel industry is a significant challenge to its market position.

Although Middle Eastern steel output is unlikely to exceed 20-25% of its total consumption requirements over the medium term, producers had been banking on a swift upturn in the regional market for recovery. Capacity growth poses a significant challenge both in terms of volume and price.

Source: Officialwire