1 High-grade iron ore derivative will be an important tool for Middle East DRI industry
A world-first 65% iron ore derivative launched by the Singapore Exchange in early December was hailed as an important hedging tool for the Middle East direct-reduced ironmaking (DRI) industry, in addition to its role in the wider steelmaking industry.
So-called 'high-grade' 65% iron ore is growing in importance as a steelmaking feedstock, largely driven by China, and the derivative allows steelmakers to perfectly hedge their 65% iron ore purchases, whereas until now they would have been exposed to basis risk by hedging on 62% contracts.
Additionally, the price of DR pellets, which are an important feedstock in the Middle East because of the region's growing preference for DRI-based steelmaking, is more closely correlated to 65% iron ore prices than with 62%, making the new derivative a better hedging tool for pellet trades too.
2 Middle East steel demand is still tied to oil prices
The year 2017 saw the lowest number of steel-using contracts awarded in the Middle East since 2012, yet average oil prices have increased year-on-year since 2016, and this has led to hopes of a corresponding increase in steel demand.
The average annual price of West Texas Intermediate (WTI) oil was $40.68 per barrel in 2016, $52.51 per bbl in 2017 and $70.28 per bbl over 2018. Indeed, a pick-up in investment in construction, oil & gas and infrastructure has been seen, with Saudi Arabia, the UAE and Iraq enjoying the highest number of projects.
Oil prices have not fared well in the second half of the 2018, however, with December seeing the lowest WTI prices since August 2017.
3 Mena region was hit hard by Section 232
The knock-on effects of the United States' Section 232 import tariffs were felt around the world, but particularly so in the Middle East and North Africa (Mena).
The Mena region has some of the lowest import duties and so is vulnerable to redirected shipments that would previously had gone to the US. North Africa was particularly hit when the US doubled import duties on steel from Turkey to 50%, the result of which was that North African countries were flooded with Turkish steel after one of its main consumer markets - the US - was cut off.
Steel prices in the UAE and Saudi Arabia fell in the second half of 2018 as global trade wars affected the region.
4 No end in sight for current global protectionism trend
Hopes that the US will repeal Section 232 do not look promising. One legal expert at the conference noted that, while the World Trade Organization (WTO) is currently assessing whether the US tariffs are in contravention of its rules, it is likely to take three to five years before a decision is made. And even after such a decision, it will be a further one to two years before any retaliatory actions by affected other countries can be approved and implemented.
In the meantime, there was increasing talk that countries in the Middle East might need to implement their own tariffs.
5 Middle East producers are looking at diversifying into flat products
Middle East steel production is largely focused on long steel products, given that demand in the regional primarily stems from construction projects, and with construction demand having decreased from its peak a few years ago, the region is now self-sufficient in long products.
The region still has to import flat steel, though, because there is only one producer of hot-rolled coil in the Middle East - Saudi Arabia's Hadeed Sabic. However, other producers are now looking at diversifying into flat steel products, particularly given the threat to margins from global protectionism and increased imports, with at least two companies rumored to be planning such investments.
Additional reporting by Marina Shulga