Large-scale infrastructure projects have helped Saudi Arabia's industrial sector weather a drop in global steel prices

Saudi Arabia’s metals industry is currently going through significant upheaval. While aluminium production has been growing since the first bauxite was successfully mined from the Kingdom’s Al Ba’itha mine in May 2014, steel production has dropped amid declining prices. Nonetheless, with so many large-scale infrastructure projects ongoing in the Kingdom, there should be plenty of opportunities in the near and long term.

“Saudi Arabia is a good place to do business if you are involved in metals. The operational costs are low as there are good incentives – land, utilities, even workforce costs if you are hiring Saudis,” Abdulkadir Farah, vice-president of business development at Modern Industrial Investment Holding Group, told OBG.

Steel Output

Saudi Arabia’s steel production declined in 2015 after showing steady growth in 2014. In 2015 local steel production dropped back down to 5.7m tonnes after rising by 5% to 6.3m tonnes in 2014. In December 2015 Saudi steel production was estimated at 405,000 tonnes, compared to 547,000 in December 2014. Across the Middle East steel production was down slightly on the year, with production totalling 27.4m tonnes in 2015, compared to around 28m in 2014.

Hadeed Saudi Iron and Steel Company, a wholly owned subsidiary of Saudi Basic Industries Corporation (SABIC), dominates the industry, accounting for 40-45% of the Kingdom’s steel market. The company produces steel rebar, wire rods, hot- and cold-rolled coils, galvanised coil and flat steel products. In 2014 the company announced that it aimed to add 4m tonnes of annual steel output capacity by 2025, meaning a total of 10m tonnes of steel a year. “SABIC’s total steel production now is 6m tonnes per year. Now our ambition for 2025 is around 10m tonnes. We have to be reasonable, as steel is a very tough market,” Abdulaziz Al Humaid, SABIC’s executive vice-president for metals, told OBG. However, since that time and in the face of lower global steel prices – caused by domestic oversupply in China, which led the country to flood foreign markets with low-cost steel – the company has announced plans to reduce costs, and the expansion seems to be on hold.

In the fourth quarter of 2015, Hadeed reported a net loss of SR1.1bn ($293.3m) year-on-year despite reduced expenditure. One SABIC executive told media in November 2015 that the company would continue to cut costs in 2016, as it does not expect global steel prices to recover for two to four years. Hadeed has trimmed costs by 20% since early 2015 and also cut the domestic retail price for steel rebar by SR200 ($53) per tonne, equivalent to about 10% of the total price of SR2200 ($587), in September 2015. By March 2016 it was reported that Hadeed was offering steel rebar at SR1800 ($480) per tonne. Saad Al Mojel, chairman of the Saudi National Industrial Committee, was quoted in the media as saying that his plants intend to cut output by 20% in 2016. The government’s decision to reduce subsidies for natural gas, along with a basket of other feedstock in December 2015 (see analysis), could have a dampening effect on Saudi steel companies’ growth.

Construction

Local steel consumption is largely fuelled by the construction sector, which has grown rapidly in recent decades. However, at the time of publication the local housing market was flat, and investors were not pushing through many new projects. According to some reports, the Kingdom had a stockpile of 1.8m tonnes of steel in February 2016, which led a number of steel plants to reduce production by up to 50% and close down some of their smelting facilities.

The country has witnessed a 10-15% decline in steel demand, with builders waiting for the real estate market to rebound and prices to rise again. This has led to an oversupply of steel, which has strongly impacted domestic manufacturers. Steel producers have also been restricted by the fact that, until recently, they were unable to export their raw steel due to a ban put in place by the Saudi authorities that was designed to aid the local construction industry.

In April 2016 the Ministry of Commerce and Industry announced it was lifting this ban for cement and steel rebar, although according to local media reports at the time, certain conditions would be imposed on exporting producers who wish to export, including paying back the fuel subsidy for exported cement. “Before, steel exports were banned because there was so much construction going on and steel and cement were desperately needed. Now, with everything slowing down, they are hoping that lifting the ban will help these companies, but it will be difficult for them to compete internationally,” Nabil Walid El Kachef, general manager of National Aluminum Factory Company, told OBG. “The lifting of the export ban on steel is a sign that projects will slow down tremendously,” he added. “The difficulty is, though, where will they export it? The global economy is slowing down and Saudi products struggle to compete with Chinese ones in terms of pricing.”

Imports

Saudi producers have also complained that the domestic steel market is being flooded by cheap imports from countries like China, Turkey and Ukraine, which are undercutting Saudi-produced steel, even though the latter is reported to be of a higher quality. Declining steel prices are putting pressure on smaller steel producers, a number of whom might not survive the current down cycle. According to some industry stakeholders, the authorities should move to introduce measures to better protect local steel producers and give priority to local steel when it comes to the construction of government-funded projects.

Demand Side

While the government has cut the national budget for 2016 by reducing spending earmarked for non-essential projects, several large-scale infrastructure projects like the Riyadh Metro and the revamping of the Kingdom’s international airports will move ahead, and these projects will continue to demand large quantities of construction materials. Fahad Alfozan, CEO of United Glass Industries Company, told OBG, “Glass installation usually comes in the last third of the project, so a delay in the completion of a project will have an impact. The glass industry has been affected by the slowdown in construction, but we are beginning to see an increase in demand so we are optimistic going forward.”

Despite a lacklustre real estate market, Saudi Arabia’s growing population, which is forecast to rise by 20% over the next decade has created demand for more affordable housing, offering commercial opportunities for the construction sector. In the first half of 2015 government departments and state-owned firms commissioned several multi-billion-riyal housing construction projects (see Construction & Engineering chapter). Additionally, a new law to be implemented in 2016 will tax owners of undeveloped land to incentivise more building in urban areas.

Other Metals

The situation in the Kingdom is more positive for aluminium and copper. In May 2014 the first bauxite was produced at the Al Ba’itha mine, owned by Saudi Arabian Mining Company (Ma’aden). The firm’s Ras Al Khair rolling mill, a $10.8bn joint venture with Alcoa, a global leader in lightweight metals technology, is said to be the world’s largest and most efficient integrated aluminium processing complex. The rolling mill has a smelter capacity of 740,000 tonnes of aluminium per year and began operations in mid-2014.

The development of the Saudi aluminium industry has been aided by the North-South Railway, which began hauling bauxite in 2014. There is a daily train running from the Al Ba’itha mine, carrying 15,000 tonnes of raw material to the deepwater port of Ras Al Khair 600 km away.

In January 2016 Ma’aden also began initial production of copper at its joint venture with Barrick Gold at Jabal Sayid, 120 km south of Medina. The mine is expected to produce 51,000 tonnes of copper in concentrate per year, which could be used to develop a local copper industry. “Saudi Arabia currently imports a lot of copper cabling, and there are projects to indigenise this,” Farrah told OBG. Others see different opportunities in the Kingdom. In 2014 iron and steel giant ArcelorMittal started commercial production at a SR3bn ($799.8m) joint-venture plant in Jubail Industrial Zone II, with the facility focused on tubular products and piping used for oil and gas pipelines. The facility, set up in partnership with Al Tanmiah Company for Industrial and Commercial Investment, has an annual production capacity of 600,000 tonnes. “The production targets new projects, especially in Jubail, and meets the needs of the Kingdom and Gulf countries of oil and gas pipes in multiple types and sizes,” ArcelorMittal CEO Timothy Erway said in January 2014.

Alloys

While there is now little in the way of a local alloy industry, according to Talal Awad Aljohani, co-director of King Abdulaziz City for Science and Technology-Cambridge Centre for Advanced Materials and Manufacturing at the Joint Centres of Excellence Programme in Riyadh, this is also an area of great promise. “We have the materials, and there is huge demand for composite alloys and metal alloys globally, so we could export. Advanced alloys have huge potential,” Aljohani told OBG. “If Saudi Arabia could make titanium-based alloys, palladium compounds, and magnesium or aluminium alloys, there are huge opportunities.”