AMSTERDAM (ResourceInvestor.com) -- Saudi Basic Industries Corporation (Sabic), the world’s largest petrochemicals company based on volumes sold, has confirmed that it is considering vast investments in the global iron ore mining sector. In the last few days, Gulf-based media has been buzzing with news that the Saudi petrochemical giant is reviving its former strategy to acquire in iron ore mines around the globe.
Sabic CEO Mohamed al-Mady stated to the press that his company has been hit hard by rising costs for steel used its multibillion dollar projects. Several Sabic officials unofficially said that the company is setting up a mining acquisition portfolio to counter part of the impact of rising iron ore prices on its steel production unit. At present, Sabic is, via its fully-owned subsidiary Saudi Iron & Steel Company (Hadeed), the largest steel maker in the Persian Gulf region.
A first attempt to acquire iron ore mines by Sabic was ended in 2007, when the Saudis decided to cancel an arrangement with several parties in Mauritania. The deal, based on a Memorandum of Understanding (MOU) with Sphere Investments and Mauritania’s national mining organisation Societe Nationale Industrielle et Miniere, was set up to develop Mauritania's Guelb el-Aouj mine and iron ore pelletising project.
Sabic, however, decided at the end of 2007 to pull out of the project, refusing to acquire a 34.9% stake. Sabic’s stake has since been taken over by Qatar Steel Company, which was already planning to buy a 15% stake in the project. Qatar Steel’s stake in Gueld el-Aouj has been raised to 49.9% as a result. Now, rising prices in the global iron ore and steel markets have forced Sabic to reconsider its strategy.
At present, the whole Gulf region, not just Saudi Arabia, is being confronted by the fact that demand for steel is outpacing supply. Sabic’s competitors in steel production recently decided to raise the prices for the much wanted steel qualities for which Sabic is looking. Al Mady indicated that the company is fighting an uphill battle in its quest to increase production at its petrochemicals plant. Increased steel prices have already put some new projects on ice.
Sabic is planning to increase its own steel production capacity from 5.5 million tonnes per year to more than 16 million tonnes per year by 2020. This will be needed to cover growing steel demand in the Kingdom. However, in order for this impressive growth strategy to proceed, the company needs to ensure that there will be enough supply of iron ore against a competitive price.
Sabic itself has raised its prices by up to 29.6% amid a surge in demand and supply bottlenecks. Prices have been increased by 26.9% to 29.6% to between SAR 3,850 and SAR 4,255 per tonne depending on measurements.
Total Saudi steel production, coming from Hadeed, Rahji Steel and Al Tuwairqi, is about 8.43 million tonnes per year. Until now, main iron ore sourcing has been done in Ukraine and Turkey, as well as other Central Asian, Caspian and Middle East countries. The company’s attempt to take a stake in the Mauritanian project would have fit well with its plans.
One major iron ore producer, Brazil’s Vale [NYSE:RIO], announced at the beginning of this month that it has increased the price of iron ore pellets by 86.7%. Vale increased prices following the conclusion of negotiations with four Middle Eastern steel makers: Ezz Steel (Egypt), Libyan Iron and Steel Company, Qatar Steel Company and Sabic. The new reference price per dry metric tonne Fe unit for 2008 is $2.4222 for Tubarão direct reduction pellets.
Iron mine owners and operators around the world can expect a call from Saudi officials for a chat in the coming weeks. Saudi officials have not given any specifications on possible targeted regions; however, North African, Central Asian and even West African assets are could be considered and assessed inside Hadeed and Sabic offices.
Demand in the Persian Gulf region will increase dramatically when the new steel plants come on-stream. Sabic’s move to try to take a part in the total value chain can be seen as a logical step towards controlling its costs. At the same time, it will give the petrochemical giant an opportunity to diversify its own portfolio.
Some moves are expected soon; prices for assets will for sure increase substantially if other petrochemical and oil companies follow in Sabic’s footsteps.