Emirates Steel Industries has gained control of 45 per cent of the UAE steel market and hopes to grow even bigger through a major GCC acquisition within a month, the company's chairman said. An expansion in output by Emirates Steel (ESI) that began in June has cut the country's imports of steel significantly and left the firm with a larger share of the construction steel market than previously forecast, said Hussain al Nowais.
The state-owned ESI, which is based in Musaffah, aims to become the Gulf's largest steel company as part of the Government's efforts to develop heavy industry in the emirate. Mr al Nowais, who first mentioned an acquisition in April, said the deal was nearly complete pending final due diligence. "We have signed a memorandum of understanding to acquire 100 per cent interest in a company in the region of the Gulf," he said.
Mr al Nowais declined to offer the name or output capacity of the targeted firm, but he said it was a major producer of flat steel products. ESI wants to increase capacity to 6.5 million tonnes a year within five years, from 2 million tonnes today. An expansion now under way will produce an additional 1 million tonnes by the end of 2011. "The intention for the acquisition, which we are currently going through our due diligence phase, will be a source for flat products," he said. "If this acquisition is completed, that flat steel target company will be the entry into this structure."
Mr al Nowais spoke at a ceremony on Monday night to mark the signing of a Dh1.7 billion (US$463 million) contract with Danieli, the Italian steel firm, for construction of part of ESI's second-stage expansion at Musaffah. The expansion will allow ESI to produce "heavy section" steel products, such as steel beams in skyscrapers. With some modifications, the new mill could also produce railway tracks for proposed metro lines in Dubai and Abu Dhabi, a countrywide freight line and a regional rail network, Mr al Nowais said.
The signing of the contract, the last major expenditure in a Dh9bn expansion, will help the company offer long-term financing terms to banks by the end of the year and complete the financing scheme by the middle of next year, said Stephen Pope, ESI's chief financial officer. "Now that we have all our contracts in place, we are in a position to go for a longer term financing of phases one and two," he said.
In the interim, ESI has funded its expansion activities with a $500m bridging loan, which comes due late next month. Mr al Nowais said the company received an enthusiastic response from banks when it sought a new $700m bridging loan, which "shows the confidence that banks have in the Abu Dhabi economy and in Emirates Steel". Banks offered ESI $850m, he said. ESI is pursuing the expansion during a severe downturn in the steel market that experts say could last for years. The company's steel products are selling at about $520 a tonne, down from $1,300 a tonne last year, Mr Pope said. At their lowest, prices hit $420 a tonne earlier this year, he said.
Despite the fall in absolute prices, the company's profit margin on each tonne remained strong, Mr Pope said. "As long as we protect our margin, prices can go wherever they want." Mr al Nowais predicted that prices would rise by the time the second-stage expansion was completed. The chairman, who is also an executive in a number of other key firms, including Waha Capital and National Petroleum Construction Company, expects Abu Dhabi's economy to grow by almost 10 per cent this year.
"Abu Dhabi's economy is an economy which is driven by government expenditures. So, as long as government continues with their plan, which is their declared intentions so far, then the economy will prosper," he said. "I would say we will not see double-digit growth, we will see high single-digit growth." cstanton@thenational.ae