CAIRO: The steel market sits at an industry crossroads, driven not only by the energy markets but also from the real estate markets which it supplies.
With energy prices on a long-term rise and the real estate market in Egypt booming, Ezz Steel announced yesterday record profits for the first half of 2008, dwarfing its robust 2007 numbers.
Ezz reported a 63 percent increase in net profit to LE 1.02 billion.
One of the main drivers behind this dramatic rise in profits was the decision to increase the production of flat steel, typically used for industrial purposes, through Ezz Dekheila, in which Ezz Steel has a 50.3 percent ownership stake.
In Addition, Ezz has been a main beneficiary of exploding real estate markets.
“You are still seeing a significant urbanization in this part of the world, commented Tarek Shahin, a steel industry analyst for Beltone Financial.
The result of this urban boom has been a significant proliferation of housing developments around Cairo, creating a surge in the demand for steel.
Ezz is also expected to be able to contribute to affordable housing developments without taking a hit to their margins.
National Democratic Party members have formally requested that Ezz sell steel rebar to the participants of Ibni Beitak (Build Your Home), an ambitious project aimed at creating affordable housing options for the middle class, at factory prices.
This move would effectively remove from the process traders who typically buy their steel from Ezz and sell it at increased retail margins. Involvement with Ibni Beitak would give Ezz, which rarely details in retail, a new and significant wholesale customer.
Ezz has been able to watch its profits soar without hoarding supply or making other attempts to move the market artificially.
“For the most part, Shahin said, “the producer, even though they’re seeing an increase in profits, are not manipulating the market.
Though the booming real estate market has proved a reliable friend to the steel industry, steel’s relationship with energy prices is more complex.
Gas accounts for 10-12 percent of steel production costs, meaning that shifts in the price of energy could drive steel prices up, noted Shahin.
Up until last month, when oil prices faded, thundering oil prices played a role in driving the steel market.
Coal prices also have an impact on the price of steel.
“There is definitely a shortage in coal, said Shahin.
Other inputs have also played a role in driving the market. Steel companies, observed Shahin, “were increasing their prices to anticipate a sharp increase in the cost of inputs, including iron ore.
The complexity of steel’s relationship with oil, however, has to do with the general wealth that sky-high oil prices bring to the region.
“As long as oil is high, this region is still very strong, said Shahin.
The Emirates, for example, awash in petrodollars, have brought unprecedented levels of investment to Egypt.
This holds especially true for the real estate market, which has seen the inception of petro-funded UAE projects like residential development Uptown Cairo and coastal tourism project Marassi.
The latest decreases in the price of energy have not yet been felt in the Egyptian steel market, and steel prices are likely to remain high until the trend of oil prices begins to hint at a longer term decrease.
