has the me's cost competitiveness in steel seen a ... · has the me's cost...
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1© 2006 SteelConsult International Page
Has the ME's costcompetitiveness in steel
seen a structuralimprovement?
SteelConsult InternationalDrentestraat 111083 HK AmsterdamThe NetherlandsTel: + 31 (0)20 661 8900E-mail: info@steelconsult.comwww.steelconsult.comwww.steelearningsbarometer.com
Metal Bulletin
10th Middle East Iron & SteelConference
10-12 December 2006
JW Marriott Hotel, Dubai,UAE
2© 2006 SteelConsult International Page
Introduction
About SteelConsult International
• SteelConsult International is a consultancy specialized in the iron & steel industry and itsmarkets.
• From our offices in Amsterdam, The Netherlands, we work for clients around the world, incl. steelmills, distributors, processors, traders, consumers, banks, government institutions and suppliersto the steel industry.
• Our consultants have a background in the iron & steel sector, providing a firm base of experienceand an extensive contact network across the industry.
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3© 2006 SteelConsult International Page
Middle-East Cost Competitiveness in Steel
Many countries in the ME have a large wealth of oil & gas
Oil production (1,000 bbl/day)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Mo rocco
Algeria
TunisaLib
yaEgypt
UAE
Saudi Arabia
Bah rain
Om
an
KuwaitQata
rIra
qIra
n
Jord
an
Lebanon
Syria
Yemen
0
10
20
30
40
50
60
70
80
90
100
Oil produc tion Gas produc tion
Source: CIA
Gas production (bln m3/year)
4© 2006 SteelConsult International Page
8.4
7.6
6.6
6.6
5.8
5.7
4.8
2.9
2.6
1.6
1.5
1.2
1.1
0.9
0.8
0.7
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0
USA
Canada
UK
Belgium
South Korea
Japan
China
India
Ukraine
Bolivia
Trinidad
Iran
Russia
Oman
Qatar
Saudi Arabia
Middle-East Cost Competitiveness in Steel
Natural gas prices are much lower than in the emerging markets ofChina and India and the mature markets of Japan, Europe and NorthAmerica
Source: American Chemistry Council
Natural gas cost by country 2005 (US$/GJ)
5© 2006 SteelConsult International Page
Middle-East Cost Competitiveness in Steel
Pushed by higher iron ore and energy prices, ME DRI production costshave doubled between 2000 and 2005. Cost prices are expected to comedown in 2010 and 2015, but remain at higher levels than in the past
54 57
130
105
83
3 4
7
6
6
0
20
40
60
80
100
120
140
160
180
200
1995 2000 2005 2010* 2015*
DRI pellets del Natural gas Electricity Labour Other
DRI operational cost price**, GCC (US$/tonne DRI)
Source: SBB, MB, local specialists, SteelConsult analysisNote: **excl. overhead and capital costs, incl. maintenanceAssumed 100% fed by pellets Capacity 500k tpy facility
54 57
130
105
83
4
10
8
8
5
0
20
40
60
80
100
120
140
160
180
200
1995 2000 2005 2010* 2015*
DRI pellets del Natural gas Electricity Labour Other
DRI operational cost price**, Egypt (US$/tonne DRI)
6© 2006 SteelConsult International Page
Middle-East Cost Competitiveness in Steel
However, despite its raw material disadvantage, the GCC’s energybenefit makes it one of the world’s most competitive regions forproducing DRI. Costs are some US$80/t lower than in the USA.
110 115130
120130 130 130 125
1212
7 30
3755 64
83
44
4
10
7
1810
9
0
50
100
150
200
250
VenezuelaRussia GCC India China Japan Europe USA
DRI pellets del Natural gas Electricity Labour Other
DRI operational cost price by country/region, 2005 (US$/tonne DRI)
83% 84% 87%
72% 72%
60% 59%54%
9% 8% 5%
19% 21%
26% 29% 36%
3% 3% 3% 6%4%
9% 5% 4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
VenezuelaRussia GCC India China Japan Europe USA
DRI pellets del Natural gas Electricity Labour Other
DRI operational cost price by country/region, 2005 (%)
Source: SBB, MB, local specialists, SteelConsult analysisNote: **excl. overhead and capital costs, incl. maintenanceAssumed 100% fed by pellets Capacity 500k tpy facility
The price of natural gasis the main costdifferentiator inproducing DRI
7© 2006 SteelConsult International Page
Middle-East Cost Competitiveness in Steel
Like for DRI, EAF steelmaking costs have also increased in the ME…
74 78
164
136113
10 11
19
16
165861
66
66
66
0
50
100
150
200
250
300
1995 2000 2005 2010* 2015*
DRI Electricity Labour Other
EAF operational cost price**, GCC (US$/tonne liquid steel)
Source: SBB, MB, local specialists, SteelConsult analysisNote: **excl. overhead and capital costs, incl. maintenanceAssumed 100% fed by pellets Capacity 500k tpy facility
70 77
165
135111
1116
28
24
24
52
55
59
59
59
0
50
100
150
200
250
300
1995 2000 2005 2010* 2015*
DRI Electricity Labour Other
EAF operational cost price**, Egypt (US$/tonne liquid steel)
8© 2006 SteelConsult International Page
Middle-East Cost Competitiveness in Steel
In EAF steelmaking, the ME cost advantage over India, China and thedeveloped parts of the world is even more pronounced than for DRI.However, Venezuela and Russia are even more cost competitive
146 151 164183 197
237 242 254
18 2019
4531
8045
40
0
50
100
150
200
250
300
350
400
450
VenezuelaRussia GCC India China Japan Europe USA
DRI Electricity Labour Other
EAF operational cost price by country/region, 2005 (US$/tonne steel)
63% 63% 65% 62%67%
61%66% 68%
8% 8%7% 15%
11% 20% 12% 11%
28% 28% 26% 22% 22%17% 18% 18%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Ve nezuelaRussia GCC India China Japan Europe USA
DRI Electric ity Labour Other
EAF operational cost price by country/region, 2005 (%)
Source: SBB, MB, local specialists, SteelConsult analysisNote: **excl. overhead and capital costs, incl. maintenanceAssumed 100% fed by pellets Capacity 500k tpy facility
9© 2006 SteelConsult International Page
Middle-East Cost Competitiveness in Steel
Why does the ME account for such a high share of DRI expansions?An important difference with Venezuela and Russia, is that the MEregion is still a large net importer of steel
Production/consumption ME, k tonnes
0
10,000
20,000
30,000
40,000
50,000
60,000
95 96 97 98 99 00 01 02 03 04 05 06e 07* 08* 09* 10*0
5,000
10,000
15,000
20,000
25,000
30,000Steel consumptionCrude steel productionApparent steel shortageLinear (Trend)
Apparent steel shortage, k tonnes
Source: IISI, MESTEEL, UN Statistics, company websites, local specialists
10© 2006 SteelConsult International Page
Middle-East Cost Competitiveness in Steel
In addition, the price of oil does not only provide a comparative costadvantage to the ME region in producing energy intensive products,but also boosts local consumption of steel, esp. in construction
0
50
100
150
200
250
300
350
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05
Steel consumption ME Price of oil*
Source: EIA, EIU, IISINotes: *OPEC average (US$/barrel)
Index value, 1995 = 100
11© 2006 SteelConsult International Page
Middle-East Cost Competitiveness in Steel
Furthermore, high oil revenues facilitate the finance of newinvestments, including those in DRI and EAF plants
Capacity expansions ME, m tpy
0
2
4
6
8
10
12
14
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06e '07* '08* '09* '10* '11ff*0
10
20
30
40
50
60
70
EAF DRI/HBI Oil price
Price of oil, OPEC average (US$/barrel)
Source: SBB, MB, company websites, local specialists
12© 2006 SteelConsult International Page
Middle-East Cost Competitiveness in Steel
Finally, due to its relatively low volume of manufacturing activity, theME is not as scrap rich as some other parts of the world. The mostimportant source of scrap in the Middle-East is obsolete scrapScrap availability ME by source, m tonnes
0.8 0.8 0.9 0.9 0.9 1.0 1.1 1.3 1.5 1.5 1.71.0 1.1 1.2 1.2 1.2 1.3 1.6 1.5
1.9 2.0 2.11.9 1.9 2.0 2.0 2.4 2.32.4
3.2
4.0 4.2 3.5
0.1
-0.1 -0.2-0.9 -1.4 -1.6
-0.3 -0.6-1.5 -1.3
0.4
-4
-2
0
2
4
6
8
10
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Home scrap Prompt scrap
Obs olete scrap Net imported sc rap
Source: IISI, MB, MESTEEL, UN Statistics, company websites, local specialists
• Home scrap is producedat the mill and instantlyrecycled.
• Prompt scrap isgenerated as waste byproducers of metalproducts.
• Obsolete scrap becomesavailable when used metalproducts are collected forrecycling.
• Metal products havedifferent life cycles,varying from cans (6months), cars (7 years) tobuildings (>20 years).
• Part of past steelconsumption is lost andnever recycled.
13© 2006 SteelConsult International Page
Middle-East Cost Competitiveness in Steel
Prices for scrap, pig iron and DRI/HBI are usually aligned. Metallicsprices have about doubled since 2003 and have become more volatile
0
50
100
150
200
250
300
350
400
J M S J M S J M S J M S J M S J M S J M S J M S J M S J M S
Sc rap Rotterdam, fob export*
Pig iron, export CIS fob Black/Balt ic Sea
DRI, import c& f Europe
Price, US$/metric tonne
Source: SBB, MB, MidrexNote: * 50% HMS#1, 50% HMS#2
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
14© 2006 SteelConsult International Page
Middle-East Cost Competitiveness in Steel
The margins between the operational cost price of DRI in the ME andinternational metallics prices have vastly improved since 2002
0
50
100
150
200
250
300
350
J M S J M S J M S J M S J M S J M S J M S J M S J M S J M S
Sc rap, sales price Rotterdam, fob export*
Pig iron, sales price CIS, fob Black/Baltic Sea
DRI cost price** GCC
Price, US$/metric tonne
Source: SBB, MB, local specialists, SteelConsult analysisNotes: * 50% HMS#1, 50% HMS#2 **excl. overhead and capital costs, incl. maintenance
The margins between the operational cost priceof DRI in the ME and international metallicsprices have vastly improved since 2002
Metallics markets went through a period of prolonged weaknessbetween 1998 and 2001, as global markets were suffering fromlarge scale opportunistic supplies of pig iron from the CIS
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
15© 2006 SteelConsult International Page
Middle-East Cost Competitiveness in Steel
World oil prices have made a step change up. The EIA expects worldoil prices to remain between US$45-60/barrel until 2030. Even in thelowest price scenario, the oil price is expected to remain above thelevel of the previous peak in 2000
0
20
40
60
80
100
120
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04'06
*'08* '10* '12* '14* '16* '18* '20
*'22* '24* '26
*'28* '30*
High price
Reference
Low price
Source: Energy Information Agency (US Department of Energy) Annual Energy Outlook 2006
World oil price (real prices in 2004 US$) in EIA Annual Energy Outlook 2006
Forecast
In its reference case, theEIA expects oil prices toremain between US$45-
60/barrel until 2030
Previous peak
16© 2006 SteelConsult International Page
Middle-East Cost Competitiveness in Steel
Reserves of oil & gas will last for at least several generations more inmany countries in the ME
Years of reserve oil
0
50
100
150
200
250
Algeria
Tunisa
Libya
EgyptUA E
Saudi Ara
bia
Bahrain
Oman
Kuwait
Qatar
Iran
Syria
Yemen
0
100
200
300
400
500
600
700
800
900
Years of reserve oil Years of reserve gas
Source: CIANote: At current production levels
Years of reserve gas
17© 2006 SteelConsult International Page
Middle-East Cost Competitiveness in Steel
Thank you for your attention!
SteelConsult InternationalDrentestraat 111083 HK AmsterdamThe Netherlands
Tel: +31 20 661 8900Fax: +31 20 661 8901Email: [email protected]
www.steelconsult.comwww.steelearningsbarometer.com