MARKET TALK: Steel experts discuss competition
Faced with tough market conditions, steel producers need greater transparency and a clearer voice if they are to stay strong
Asim Siddiqui (AS): We are going through a period of overcapacity. And not just in the Middle East. We had the Chinese construction boom from 2003 to 2008 when a lot of countries increased steel capacity. Now, we have many more players in the market than 10 years ago. Competition is extremely fierce and margins are a lot tighter. We are getting to a stage where best practices may not be properly followed in order to get orders.
With the slowdown in construction, we are seeing liquidity tighten up. We are no longer just steel suppliers; we are being used as a cheap form of financing in the supply chain. We are seeing extended credit periods and delayed payments, which are adding to cash flow pressure on businesses, particularly steel traders. Steel traders must be careful how they manage cash flow.
The way we do business is changing. Ten years ago, the main goal of many steel traders was to get as much business as possible, and to look at top line turnover. Now the focus is on net profit, the bottom line. We are moving towards quality, whereas before we wanted as much quantity as possible.
There are also structural changes. Last year, we had the introduction of VAT in the UAE and Saudi Arabia. In the UAE, we now have Al-Etihad Credit Bureau reports coming out. We didn’t have any kind of credit bureau five or 10 years ago. We are seeing more transparency in the market and more of a check on reality than at any time before.
Q: Is it the same story for reinforcement steel (rebar) suppliers?
Rohit Valrani (RV): The entire steel industry is facing similar issues. We are being utilised as a cheap form of financing in this market. We have oversupply on the rebar side, similar to the structural steel sector. We have a large number of traders within the market that are also finding, somehow, cheap financing. Overall, there is a flight from volume and quantity to quality. It is also challenging to get information flows between the various segments of the steel industry.
Today, we are in a situation where the top line is less important and the bottom line is extremely important. As a business, we have moved away from just looking at volumes. We don’t necessarily target big jobs anymore. We target more profitable jobs. We look at the customer.
One of the most important things for us is knowing the payment cycle. Our margins are being eaten away by delayed and protracted payments. This is an issue that’s been happening over the past couple of years – and this year, a little bit more.
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Q: How do you identify the right customers to work with?
RV: We have been in the industry for many years, so generally hear what is happening in the market. If we are dealing with a customer we know and who has a good history with us, we are okay with giving them credit on the assumption that they’ll pay at regular intervals, and not extend the payment cycle too much. That way, we protect our margins.
Our due diligence has got much better over the years. We no longer take a project knowing the contractor only. We want to know who the client is for that contractor. A lot of times, we try to assess the business model. What is the purpose of that building or structure? If the building is for off-plan sales, we tend to be a little cautious given the market today. If it’s an infrastructure job, we know what to expect in terms of payment cycles, so we deal with that accordingly.
Generally, if you’re dealing with a project that is for the nation and is government-backed, you’re quite comfortable you will be paid. Payments can go up and down, but you know you’re safe with that specific contractor. In the private sector, it is sometimes more challenging. There are businesses that are a little bit more ill-conceived, business plans that haven’t been thought out completely. We try to be careful where we supply.
Q: What should the steel industry be doing about it?
AS: Companies have to change the way they do business. We are looking at alternative markets. We are seeking further away export markets where payment practices are different, maybe shorter or more secured. We are looking at the Far East, for instance. And we are looking at the Asian subcontinent markets where payment terms are shorter. India is going through tremendous development opportunities. We have even had enquiries from South America for steel. Africa is another great growth market with different payment terms. Whereas we were doing maybe 90 per cent locally in the UAE in the past, we now might be doing more like 60 per cent locally and 40 per cent into these types of markets.
Q: Is it the same for the rebar community?
RV: Markets such as Africa are manageable places to export to, but most of these markets have their own producers and their own specifications that regulate who can supply and who can’t supply in the market. Even though we have a relatively liquid product in terms of rebar and can export it, it’s not always that straightforward.
Q: Where are the growth opportunities for rebar traders?
RV: Egypt and Iraq are markets we’ve looked at several times. Iraq is always going to be an option as a market. But there are concerns with places such as Egypt and Iraq – specifically the ability to actually operate within those markets and having enough knowledge of those markets. They are not the same as the market here in the UAE, where the ease of doing business is phenomenal.
Q: What other industries offer the best opportunities?
RV: Our product is something that goes into the oil and gas industry as well as construction. It is much more of a commoditised product. We are not really fabricating elements for the various items going into oil and gas, whether it’s a rig or otherwise. Infrastructure is something we have had a lot of interest in over the past several years. We’ve spent a lot of time penetrating that sector, whether it’s bridges, tunnels, airports. These are things that we’ve been doing over the years to mitigate the risk of the real estate sector declining, which is seeing consolidation today.
We have looked at diversifying our product portfolio beyond rebar. We do a lot of wire processing, for example. We’re looking at some of these other value-added products, which are easily exploitable and go on more secure terms. We are not exposing ourselves to 150, 180 or 210 days of open credit. You are in a situation where you’re dealing with letters of credit (LCs) and payments are in hand before the goods leave.
AS: We are also looking at focusing on different sectors, such as oil and gas, and less on construction. We can do that in structural steel by focusing on more flat steel products that cater to specific industries that have a healthier financial model or cash flow.
Q: What other changes are required in the steel industry?
AS: We need to follow best practices. When I came to Dubai in 1995, a 90 to 120-day credit cycle was more than sufficient to collect your money, pay your suppliers, pay your banks, buy new steel and carry on. But thanks to the global financial crisis, falling oil prices and everything else, this has been extended.
At the moment, everybody is trying to undercut each other in a very unhealthy manner. We need to work together with other industry players to understand our collective problems, save costs through economies of scale and promote the best practices.
The government is very supportive, and can continue to increase that support. Late payments are the number one problem, and extended payments. Perhaps a late payment law is needed. There are initiatives by private players in conjunction with the government to try to improve the market. Through Emirates Steel, for instance, which is a government-owned company, we are having these discussions with them. They’re also looking at having a healthy distribution model and a healthy steel market over here.
Q: What is happening in terms of coordination among producers?
AS: The UAE structural steel industry is establishing a steel traders’ association, a non-profit incorporated organisation, at Dubai International Financial Centre (DIFC) to discuss common problems, encourage best practice, promote the industry to prospective lenders and show that steel is a strategic sector.
It is particularly on delayed payments where we need a voice. We need to be able to talk about it. We need to network and find common solutions to rectify this issue. I’d like to go back to the 90 to 120-day credit cycle.
We can try to cut costs. For instance, if we look at eight or nine of us major players getting medical insurance. In 10 years our medical insurance bill for our staff has been one of the biggest increases of expenses as the laws changed and it became compulsory.
It does not have to be limited to structural steel. It can be expanded out to other producers. Collectively, as an industry, we have a lot of common problems that can be addressed together.
RV: This is something I would like to propose within the rebar industry. It brings in transparency, which is always a positive thing. It allows us to react to market needs and requirements a lot more quickly. It is a very dynamic industry that moves quickly. Prices move in China and move over here the next day. Prices move in America and impact us here. If this platform was to come into effect, it is something that could result in greater understanding of our market, which is a very positive thing, not just for us but for our customers as well.