In demand: Developments in the steel sector

Heavy industries, which include aluminium and steel production as well as mining and quarrying, contributed 12.8% of GDP in 2011, according to the Economic Development Board, the state investment agency. Bahrain’s reputation as an aluminium exporter has already been globally established, but authorities are now turning their attention toward developing the steel sector.

NEW FACILITIES: A new 1.5m-tonnes-per-annum (tpa) direct reduced iron (DRI) plant is set to come on-line in January 2013, as part of a steelworks that is currently under construction in Al Hidd by Bahrain-based steel firm United Steel Company (SULB). The DRI plant will be accompanied by a 1m-tpa melt shop and a 600,000-tpa heavy sections mill that will be able to produce medium-to-large H-beams. The $1.2bn project, which began in 2010, will employ up to 500 people once operations commence. As part of a second phase of expansion, a steel rebar mill is also planned. In April 2012, Foulath announced that it is also planning to build a new steel mini-mill as part of its steel complex in Al Hidd.

SULB is a 51:49 joint venture between Kuwait’s Gulf United Steel Holding Company (Foulath) and Japan-based Yamato Kogyo. The purpose of SULB’s facility in the Kingdom is to target the construction market in neighbouring Saudi Arabia, as well as the rest of the GCC. The main investors in Foulath include Gulf Investment Company (50%), Qatar Steel Company (25%), National Industries Holding Group (10%), Mohammed Abdulmohsin Al Kharafi & Sons (10%) and Kuwait Holding Company (5%), all of Kuwait.

In addition to its interest in SULB, Foulath already owns two Bahrain-based companies in the steel sector. The first, Gulf Industrial Investment Company, produces 11m tpa of iron-ore pellets at its plant in Al Hidd, exporting to Saudi Arabia, Qatar, Iran, India, Indonesia and Malaysia. The second, United Stainless Steel Company (USCO), manufactures stainless steel flat products and has an annual capacity of 90,000 tonnes. Some 70% of USCO’s production is for export and goes to the GCC region, the wider Middle East market and the EU.

REGIONAL MARKET: Demand for steel is set to soar on a regional level thanks in part to growth in the number of planned construction projects in the Gulf. “The current demand in the GCC for steel is 20m tonnes annually,” Khalid Al Qadeeri, the managing director of Foulath, told OBG. “All of the facilities in the region combined can only produce 12m tpa, which leaves a deficit of 8m tonnes. Some 60% of this deficit is accounted for by rebar. The demand for rebar is projected to even further increase due to the amount of developments, both industrial and commercial, planned in the coming years in the GCC.” In the Saudi Arabian market, the total value of construction contracts awarded in 2011 came to $66bn and the country has up to $300bn worth of projects planned and unawarded, making it the largest market in the region – a market that is readily accessible and next door to Bahrain.

BUYING LOCAL: The GCC market overall will likely supply a steady stream of work over the coming decade, but those already operating in the Kingdom are of the opinion that the local Bahraini market is set to see its own burst of activity in the wake of the government’s two-year spending drive, much of which has been focused on improving and expanding the country’s infrastructure. In addition, there is the Gulf Development Programme, which will provide Bahrain with $10bn over 10 years.

While in the past, contractors in Bahrain had to import steel and other building materials as the local market was unable to provide adequate supply, this is set to change. At present the Kingdom has one 200,000-tpa steel rebar rolling mill, operated by the Universal Rolling (UNIROL), but SULB is expected to bring a new rebar mill on-line in the second phase of its own expansion plans. Both of these facilities should be able to supply the local market in the near future, when the pace of infrastructure development is expected to pick up.

“Over the next five years the market will grow steadily, not at 2008 levels, but at a much more sustainable rate of growth,” Chris Robinson, the CEO of UNIROL, told OBG. “If you take the Al Hidd power station as an example, a significant amount of steel went into its construction. Now you have the growth in new residential areas, the upgrading of the road networks, the new airport expansion, new rail links and the Qatar-Bahrain Causeway. All of these projects provide a ready supply of potential customers right on our doorstep,” he said.

NEW AREAS OF DEMAND: First set up in 2003, UNIROL started commercial production in 2009 at its steel rebar mill located in the industrial area of Al Hidd and near Khalifa Bin Salman Port. The mill came on-line in 2009 just as the global financial crisis hit, so this partially delayed production in 2010 and 2011. With an annual capacity of 200,000 tpa, the mill was built to serve the domestic market. Housing and infrastructure projects that are part of the $10bn pledged to Bahrain as part of the Gulf Development Programme are the market segments on which UNIROL is focused.

Besides infrastructure and housing, there are other significant projects in the works in Bahrain, such as a new BD5.4bn ($14.2bn) Economic Industrial City, a feasibility study for which is being developed by the Ministry of Industry & Commerce. The city, which is expected to be built by 2040 according to the ministry, will cover 93.3 sq km and be built on reclaimed land near the Askar-Jaw Corridor.

In the power sector, schemes such as the 220-KV and 66-KV Transmission Development Project 2007-11 and the 400-KV Transmission Development Project 2009-13, which will connect up the national grid across the Kingdom, will require steel building materials. However, the most celebrated of all the planned major engineering projects and the one that will require substantial supplies of steel rebar is the causeway between Qatar and Bahrain, which will include both a passenger highway and a new railway line. Although 40% of the infrastructure will be completed by Doha as part of its agreement to host the World Cup in 2022, the rest will be handled by Manama, potentially providing significant opportunities for steel rebar manufacturers to supply materials to the Bahraini and international contractors involved with the causeway project.

A fully fledged domestic rebar sector would also help the country to avoid past bottlenecks that delayed major engineering and construction projects. During the construction boom in 2008, some projects came to a sudden halt due to lack of steel and cement, a shortage that additional local producers could help alleviate. Plants run by UNIROL and SULB will help ensure the country is self-sufficient and does not have to rely on imports.

GOVERNMENT SUPPORT: Compared to the aluminium industry, the steel sector has been relatively slow in terms of developing more downstream activities in the Kingdom, but this is starting to change. Indeed, there is growing awareness of the value of the sector and its potential to the economy in terms of product and in terms of jobs.

There is also a changing attitude that government should actively support local businesses. The aluminium sector will soon have a dedicated BD100m ($264m) Aluminium Fund to develop and support the future growth of downstream businesses. The Ministry of Finance has also supported the creation of a similar BD100m ($264m) Food Fund for the food processing sector. Although the steel industry has not yet received financial support of this nature, Robinson is confident that there is significant potential for the industry’s development.

“In terms of our own company strategy, there are two directions that we could go in to add value to our business and the sector,” Robinson told OBG. “We could look at building an induction furnace and producing our own steel billets and ingots, which would cost an estimated $30m. Alternatively, given the low capital expenditure involved in manufacturing, we could develop our own downstream manufacturing base and supply it with our steel rebar. We have considered both options as part of our master plan going forward,” he continued.

SHIFT IN STRATEGY: Development of downstream operations would also likely be in line with government interests. Selling primary steel to downstream firms, as happens in the aluminium sector, would provide employment opportunities at smaller manufacturing businesses and develop manufacturing skills among Bahraini workers, which the government is keen to do. Indeed, moving away from being a primary producer of steel products for export towards developing a high-tech manufacturing base that uses steel products as it input looks set to be the main focus in the Kingdom’s steel market and perhaps the wider GCC region over the coming years.