Egypt Gives ArcelorMittal an Ultimatum

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Egypt final lost patience with the world’s number one steel maker this month and issued them an ultimatum to either start construction on a proposed new steel mill or lose the license. Amid much fanfare back in early 2008, ArcelorMittal beat India’s Essar Global and al-Ghurair of the United Arab Emirates in an intense and lengthy auction to be awarded a license to build a steel pelletizing plant and billet production facility. Egypt’s rationale was to lower domestic steel prices by boosting the backward integration of the industry into early stage products not at that time produced in the country. It was believed that by producing Direct Reduced Iron pellets and basic billets domestically, Egypt could avoid imports and lower costs. Egyptian housing and real estate companies were expected to benefit from the new capacity, which would ease prices for a range of downstream products but particularly steel rebar, Egypt’s Commercial International Brokerage Co. is reported to have said in a Reuters report at the time. The industry believed that Egyptian steel producers, currently dependent on imported intermediate products, would also benefit from cheaper locally produced DRI and billets.

The license was therefore to build a 1.6 million ton DRI plant and a 1.4 million ton billet production facility at a cost estimated originally at somewhere between $800 million and $1 billion. Egypt is the Middle East’s most populous country and its construction industry has held up surprisingly well during the global downturn. However, in the intervening years the industry has had to continue to import rebar and pellets because ArcelorMittal has not followed through with the construction of the plant. The firm blames the global downturn on its repeated delays but in practice the domestic Egyptian market has been more buoyant than many other parts of the world and ArcelorMittal’s decision can only be seen in the light of a global reduction in capital expenditure rather than the economics of the local market.

That is scant comfort to the Egyptians however who had expected the steel producing facilities to be up and running by now, so according to a Reuters report the authorities have issued an ultimatum break ground by August or have your license revoked. The steel giant while heavily impacted by the downturn and still running at way below capacity see our recent article on the top ten steel producers, ArcelorMittal produced only 73.2 million tons in 2009 compared to 103.3 million tons in 2008 is not short of cash and its shares are riding high so the firm will find it hard to postpone construction beyond this year.

If it is any consolation there are probably many steel mill projects still on hold around the world but it is only in smaller emerging markets where the presence or absence of one facility can have a significant impact on the cost prices for a whole economy that such delays are most keenly felt.

–Stuart Burns

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