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THE ECONOMIC

BULLETIN

July 2012
VOLUME 8 - ISSUE 97

Growth Opportunities for the UAE Steel industry
The UAE steel industry is part of the basic material sub-sector, which is part of the manufacturing sector. Given the historical growth of the UAE economy, especially in construction, steel has been an important construction material. Furthermore, given the scope for improved design and innovations, the use of steel could also widen to include other consumer and business applications as well. This article discusses future growth opportunities for UAE steel industry given growth in the UAE economy and export prospects in potential foreign markets. It is based on information from the World Steel Association (WSA). According

to WSA, the world’s top steel companies in 2011 included Arcelor Mittal, Hebei Group, Baosteel, POSCO, Wuhan Group and Nippon Steel. Also in 2011 the top four steel producing countries were China, Japan, USA and India. These countries can serve as important source of steel for UAE businesses producing value added steel products for domestic use and exports. UAE Steel Industry overview Table 1 provides data on the number of companies engaged in different activities related to steel production and trading in Dubai. A healthy trend is shown because the number of companies engaged in steel manufacturing and trading has increased overtime indicating a buoyant and growing steel industry. Also as the data shows, significant
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Areas in which differentiation can be done include timely delivery of products to final customers.85 114. Table 2 shows some iron and steel sub-products with fast growing exports and re-exports from the UAE. Producing more sustainable designs and promoting the sustainability of steel use could further increase sales to domestic and foreign customers concerned about the environmental impact of their activities.000 50.000 30. fabricators and designers could make use of the recyclable property of steel by designing products which are easier to recycle. UAE steel businesses could develop closer links with importers in those countries. Given expectations for the long-term development in economies in the MENA region.82 149.000 20. Demand for steel could also come from the use of steel in other applications in industry.increase is seen in the number of companies involved in different types of steel trading which is in line with the data in table 2. structures of iron and steel have registered a CAGR of about 34% from 2007 to 2011. Figure 1. From 2001 to 2010. countries in South Asia such as India and Pakistan 3 . Oman and Qatar. Table 2.. the UAE steel industry also provides earnings through exports to major markets. South America and the Middle East which has increased overtime. which would drive demand for usage of steel in construction and in appliances. the MENA region.74 7. Opportunities for the UAE Steel industry Opportunities for growth of steel businesses in the UAE domestic market are partly due to growth in steel demand from the construction industry. The trade data also shows that the major destination countries for UAE’s exports of iron and steel and articles of iron and steel have been countries in the Middle East and North Africa (MENA) region such as Saudi Arabia. Structures of iron and steel HS code 73170010. For example.2 percent of GDP in 2016. in South America about 5%. Steel consumption by region (000 metric tons crude steel) 60. better packaging.6 percent of GDP in 2012 to about 11. Nails of iron or steel HS code 73042900. demand for this important material can be expected to increase. Therefore. the potential for the uses of steel in the UAE is not limited to construction but could also include packaging. highlighting their potential as important markets for UAE steel exports. Other developing regions such as Central Asia and Eastern Europe have also seen a trend of growing use. These and other steps could position UAE steel businesses to profit from the growth of key developing markets and gain larger market shares in these markets.53 242. In addition to providing steel for a wide variety of domestic applications. UAE exporters could further explore increased exports in these and other products in the developing regions highlighted earlier.95 611.000 0 Middle East 2009 2010 2001 2002 2003 2004 2005 2007 2006 2008 Africa South America While steel is a basic commodity. it still provides room for substantial differentiation.93 Source: Dubai Chamber. thereby providing more lucrative prospects for UAE exporters. 2011 Trade data shows that UAE businesses source steel in primary form from countries like Georgia. which shows an increase in exports in some steel sub-product categories.92 81. iron ore is a major raw material used in manufacture of steel with limestone and recycled steel also being important.10 65.15 266.000 40. any weakness in global economic growth could translate into weakness in global steel demand. East Asia and Latin America. HS code 72045000 2007 2008 2009 2010 2011 187. and modern designs of articles of steel and superior customer service. Source: World Steel Association.77 102. while nails of iron and steel registered a CAGR of about 63% in same period. while semi-manufactured steel products of iron or non-alloy steel are sourced from countries like Russia. Also countries such as the USA and the UK have been important export markets.48 82. Demand for the UAE’s steel exports is therefore widespread and UAE steel exporters should further explore potential in growing foreign markets in Central Asia. UAE’s selected Steel sub-product exports and re-exports (AED million) Product category and HS code HS code 73089090.10 130. As the global economy grows over the long-run. Rising prices of these raw material inputs could also present a challenge for UAE steel businesses. East Asia and the Pacific and in Latin America to increase their steel product exports. According to BMI UAE Infrastructure report for Q2 2012. Source: UAE Federal Customs Authority. offering more hi-tech and innovative products and by making more easily recyclable products. Figure 1 shows the apparent use of steel in selected regions such as Africa.000 10. Steel Statistical Yearbook. Casing & tubing of type used for oil or gas Re-melting scrap ingots of iron or steel.65 457. Table 1.78 127. Demand for these applications could be expected to grow over the long-term with growth of the UAE economy. In addition to providing steel for a wide variety of domestic applications. Challenges for the UAE Steel industry Demand for steel depends on growth of the global economy.76 309. Foreign demand for steel is dependent on the growth of the global economy. These challenges can partly be mitigated by introducing more efficient production processes and producing more value added designs in steel products. Another challenge for the UAE steel industry is to source cheaper raw materials. in the Middle East about 7% and South and East Asia at about 10%. Also the need to produce and sell more sustainable steel products could also present a challenge overtime. Germany and Sweden. Doing so could mean that they are able to establish a strong market presence in these countries and increase their profit margins by providing quality products and differentiating their product and services. it also provides earnings through exports to major foreign markets. UAE steel manufacturers. the share of the UAE construction industry is forecasted to increase from 10. homes and furniture in foreign markets. apparent steel use in Africa has increased at a Compound Annual Growth Rate (CAGR) of about 6%. Ukraine and Malaysia.11 136. use in automobile parts or as stainless steel in applications such as cutlery.41 32. According to WSA.96 157. USA. to gain market share over competitors thereby contributing to the long–term growth of UAE exports to the world. furniture or industrial applications. According to WSA.70 11. Major steel activity companies registered with Dubai Chamber Item Basic Steel Products Trading Steel Fabrication and Welding Workshop Steel Constructions Contracting Reinforcement Steel Bars Trading Steel Hangars and Sheds Manufacturing Structures and Structural Steel Manufacturing 2009 2010 621 179 152 82 88 65 661 192 157 90 92 73 2011 705 199 159 96 93 76 Up to Apr 2012 718 199 160 100 93 77 and countries in the East Asian region such as Indonesia and Malaysia. Conclusion The UAE steel industry is an important part of the manufacturing sector and therefore the UAE economy.03 88. Turkey. in South Asia.

Efforts to stabilize fiscal positions and reduce debt burdens must therefore be complemented by competitiveness enhancing reforms aimed at improving the potential for economic growth.00 5.50 -0.1 6. policies. along with a number of other GCC countries.89 Figure 2: Regulatory Quality.2.74 5.UAE competitiveness has improved while the business environment remains robust According to the definition of the World Economic Forum (WEF). it is projected that UAE would definitely seek to ensure that its GCC peers will consider introducing a similar form of tax simultaneously in order to ensure that domestic competitiveness is maintained.7 years. whereas general standards across the region have been intensely improved during the last few years.51 0. below Switzerland (in the 1st place). and factors that determine the level of productivity of a country. a trend that has been advancing in recent years (Figure 2). the legal and regulatory environment is more than adequate in UAE. UAE ranks 27th out of 142 countries. contract enforcement (134). UAE has long been an attractive investment destination.50 1. In addition. such as Oman (32nd).2 thus placing UAE as one of the highest-ranking countries in the GCC region. Figure 1: Relative Competitiveness 2011/2012 Switzerland United States Qatar Saudi Arabia UAE Oman Kuwait Bahrain Egypt 0.4 years and the average OECD experience of 1. UAE has recorded the first place globally in the field of efficiency of governmental fiscal policy issued by the International Institute of Management Development (IMD) in Switzerland. UAE advanced two places to 33 out of 183 countries compared to the rankings of the previous year.1 4.00 8. competitiveness is identified as the set of institutions.6 4.5 = highest quality Source: Dubai Chamber based on data from world bank governance indicators Figure 3: Corruption Index. Added to that.54 0 = most corrupt 10 = least corrupt Source: Dubai Chamber based on data from Transparency international 7 = most competitive Source: Dubai Chamber based on data from world economic Forum Moreover. has recently raised the possibility of introducing a widespread value added tax (VAT) over the next few years. 6th for registering property and 7th for paying taxes.00 6.00 2. government effectiveness is high and the overall freedom to conduct business is well protected under the existing regulatory environment. Qatar (14th) and Saudi Arabia (17th).00 2.24 5.62 4. according to the World Bank’s Doing Business 2012 report. Added to that. According to Transparency International’s Corruption Perceptions Index. Kuwait (34th).7 cents and 68. UAE has become more competitive. while corporate taxation is limited to oil-producing companies and foreign banks.00 least competitive 3. The purpose of this article is to analyze the latest trends in the international competitiveness and business environment of the UAE. This score is the second-best of the GCC region.1 years. with a score of 4. United States (5th).9 4. Moving forward. UAE scores reasonably well in comparison with other countries in the region for its rule of law.4 7. According to the World Bank’s 2011 World Governance Indicators (based on figures for 2010).2 cents for the average OECD countries. the regulatory quality is improving in UAE. Policymakers are advised to look into these problematic issues of business environment and bring them up to the best practice in the region.90 . the control of corruption has upgraded. receiving a score of 6.3 and the 2003 report when it received a score of 5.54 0.50 0. UAE score has dramatically improved since the 2010 when it received a score of 6. The reason behind this stems from the fact that a highly competitive taxation regime strengthens Foreign Direct Investment (FDI) inflows. UAE government. UAE ranks 5th in the world for trading across borders.77 0.00 10.43 5.42 1. Moreover.50 2. however there are a number of challenges that need to be addressed. With the upsurge in government revenues as a result of the increase in the oil price and the economic recovery gaining momentum.50 -1. according to the same report. 2011 New Zealand Qatar United States UAE Bahrain Oman Kuwait Saudi Arabia Egypt 0.00 8.38 0. Overall.64 4.18 0. well above the regional average of 3. According to the World Economic Forum’s Global Competitiveness Report 2011/12 UAE ranks as the thirdmost competitive economy in the region after Qatar (1st) and Saudi Arabia (2nd). with only Qatar posting a higher result.88 4. with many exemptions in the first instance. if not in the world. the time for implementing VAT is expected to be postponed. The inadequacies of the bankruptcy legislation remain a major challenge for UAE. However. protecting investors (122) and getting credit (78).8 4.00 6. although it is expected that the level to be no higher than 5%.8 9.50 1. In the current challenging economic environment. second only to Qatar (Figure 3).5 4. there are aspects of the business regulatory environment that remain problematic. but higher than other regional peers. 2011 Switzerland United States Bahrain Qatar Oman UAE Kuwait Saudi Arabia Egypt -2. Specifically.17 4. the recent drawbacks in the Euro area are closely related to modest competitiveness performances that limit long term productivity growth. According to the World Bank’s Doing Business 2012 report. 4 . including resolving insolvency (ranked 155). UAE has successfully addressed corruption in 2011. the time taken to resolve bankruptcy is around 5. along with sustained inflation.9 (where 0 is the least competitive and 7 is the most competitive economy).15 -0. both income and sales taxes are non-existent. The recovery rate (at 11 cents in the US dollar) is low in comparison with the regional average of 29.5 = lowest quality + 2. It is far from evident that the UAE tax regime is a major attraction for foreign investors. in 2012. As the data shows. Bahrain (37th) and Egypt (94th) (Figure 1). those are accountable to a tax of the profits earned in the respective emirate.00 5.2 7.8 (where 10 represent the lowest level of perceived corruption and 0 the highest).00 2.18 0.

000 12. given the fact that on average about 23% of Dubai hotel guests are from Europe and the USA. justifying the projected increases in the industry revenues in the medium term. the number of tourist arrivals in the GCC region is projected to increase progressively from 40. the estimated room revenues from the GCC hotel industry was about USD 16 billion in 2010 and projected to rise to USD 27 billion in 2015.000. hospitality industry has emerged as a major pillar of the emirate economic development. the sector showed signs of resilience and in fact acted as one of Dubai major economic sectors that supported its economic recovery. Dubai hospitality industry experienced dynamic growth. From the Figure.000.000 Revenues in " 000" AED " 000 " 40. Dubai takes the lead in the GCC as the fastest growing holiday destination in the history of the travel industry according to the World Tourism Organization (WTO).000. the most profitable airlines internationally in 2011.3 million. Therefore.000. Conclusions To conclude. - Dubai Chamber based on data from DTCM Dubai key hospitality metrics In Dubai. As can be seen from Figure 1.3 billion (Figure 3).000.000.000 0% Dubai Chamber based on data from Alpen Capital -10% -20% -30% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 According to the same report. Dubai hospitality industry is on the path of robust recovery in line with Dubai GDP’s pick up..000. In 2011.9 billion in revenues from hotel and hotel apartments which is slightly higher than the industry revenues in 2008 of AED 15. most of the tourism activity has diverted into UAE from two of the most attractive tourism destinations of the region such as Egypt and Tunisia.000 30. The number of tourist arrivals to KSA includes the arrival of Haj and Omura pilgrims which is considered as religious tourism mainly. it is expected that revenues may be affected due to supply of large number of rooms that are expected to enter the market over the next few years.Dubai tourism industry robust recovery Hospitality industry in the GCC region is poised for growth in the coming few years.000 50. KSA is highest GCC country that receives tourists followed by the UAE.000 Oman Qatar Kuwait Bahrain UAE KSA GCC 14. According to the latest estimates by Alpen Capital (Q2-2011). Figure 1: GCC Tourist Arrivals 70. Figure 2 shows that Dubai hotel rooms and apartment flats occupancy rates started to pick up in 2010 and 2011 reaching about 74% in 2011 for both as compared to 84% for hotel rooms and 82% for apartment’s flats in 2007. in the short to the medium term the sector prospects are positive. the expansion of the middle class in both India and China will contribute greatly towards tourism receipts in the Dubai and other GCC countries. On the other hand.000 2. The majority of tourists coming to UAE opt for Dubai domestic carrier “Emirates Airlines”. Kingdom of Saudi Arabia (KSA) and the UAE dominate about 89% of the GCC region total market share and however. Post the global financial crisis. the region remains an attractive destination for investors looking for medium to long term returns. The recent political turmoil in the Arab world (Arab spring) is a good test for the capacity of Dubai hospitality sector. nonetheless. Another challenge to the revenues generated from Dubai hospitality industry is the increased number of newcomers.Based on latest data avialable form Dubai Department of Tourism and Commerce Marketing (DTCM). implying that both KSA and UAE will continue to dominate the region tourism market in the short to the medium term.000 60. by 2015 their share is expected to dip marginally to 87% in line with the expected rise in the share of other countries in the region such as Qatar and Oman. Looking ahead. the number of tourist arrivals is expected to make a remarkable jump to reach about 64.000 Figure 2: Dubai Hotel Room & Appartment Flat Occupancy 100% 80% 60% % 40% 20% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Hotel room occupancy Appartment flat occupancy Dubai Chamber based on data from DTCM The recovery in Dubai tourism market can be attributed to the increase in both hotels and apartments occupancy rate and to the increased number of tourists’ arrivals .6 million in 2015. In 2020. the Eurozone crisis and USA slow economic recovery might also present a challenge for Dubai hotels revenue and occupancy rates. The recovery of the occupancy rate is correlated to the recovery in Dubai level of tourism and business activity which is reflected positively in Dubai GDP growth rate. Dubai hospitality industry revenues registered 20% annual growth rate in 2011as compared to -19% in 2009.000. With the eruption of the Arab spring. The total number of Dubai hotels guests showed an upward trend during 2010 and 2011 registering an average annual growth rate of about 10%. UAE is considered the main tourist destination in the GCC.000 10% 8. In addition. 5 % change 20% . Another indicator for robust recovery of Dubai hospitality sector in 2010 and 2011 is the “V” shape recovery in revenues growth rates of hotel and apartment.000 10. about 61% the hotel rooms in the pipeline will be located in KSA and 29% are expected to be in the UAE and the remaining will be distributed among the rest of the GCC countries. which is reflected in the increased number of passengers coming to the UAE.000 6. Dubai has been the lead tourist destination in the GCC regarding sport tourism and event tourism. Dubai average occupancy rate of 74% is higher than the GCC average of 67%.000 10.000. Dubai hospitality industry earned AED 15. Another manifestation is the presence of the most luxurious international hotel chains attracting tourists from all over the world. Notwithstanding the current situation.000 20.9 million in 2010 to 53. which will raise the competition among the existing players and will press revenues and profit margin down.000 50% 40% 30% 16.000 4. Figure 3: Dubai Hotel & Hotels Appartment Revenues 18.

For businesses and consumers the increase low-cost OTT communication services represents a significant milestone in cost efficiencies in addition to the added ease of doing business. adjusting in accordance with network usage.000 40. Most MENA countries currently enjoy open access to VOIP services on a purely peerto-peer basis. This also opens the potential for operators to grow revenues using innovation alongside the on-going operational cost strategies in a new era of data-centric service performance. Migrating to HTML5 has the added benefit embracing an ecosystem that is app-centric such as Apple’s iStore and Google’s Play store. Sending an SMS of 140 characters using a feature phone costs approximately 18 UAE fils. For the telecommunications market OTT services mean increased competition between telecom operators to attract consumers with lower rates and better ‘bundling’ of deals in which several mobile and fixed line services are grouped together. a leading telecoms operator in Europe has partnered with an established internet browser to implement HTML5 – a coding ecosystem that makes websites and smart phones work more efficiently in terms of data and usability. Subsidies are however coming under scrutiny as revenue and margin pressures intensify going forward. subsidies on Apple products from telecoms operators are often significant but such subsidies ‘lock-in’ consumers for longer as they are less likely to migrate to other operators. can put network resources under cost pressures. Relaying the same number of characters in the form of data through most smart phones using third generation (3G) network costs less than one fil. Such services that require a data plan come with less risks of revenue erosion. Other operators have attempted to amend their service offerings. MENA subcribers (000) 100. however. This is in part driven by consumer desire to access OTT content such as video from Google’s YouTube.000 40. over-the-counter (OTC) handset subsidies for high-end smart phones have eroded bottom-line financial performance. voice over internet protocol (VoIP) and video have been evolving rapidly in recent years. In response to consumer and media backlash. strict net neutrality legislation was subsequently introduced which has limited room for operators to manoeuvre in response to OTT competitive threats. Networks have to be upgraded to accommodate the increase in traffic. however. in addition to driving subscriber uptake.000 80. The obstacles can be segmented into OTT substitution and OTT content. Transmitting several bytes of data is a relatively cheap in comparison to the traditional services that those bytes replace.000 3G Broadband subcribers (000) 100. The advantage is that operators can control the quality of the audio.0 60.000 0 2009 2010 2011 2012 2013 2014 2015 2016 0 Source: BMI On balance. video from YouTube or Netflix. For example.0 0. These OTT content platforms present a spectrum of opportunities to operators. This will enable operators to compete on a more even footing in terms of innovation. also risks reducing space for experimenting with price and service delivery in the future across a broader range of other OTT services across mobile and fixed devices.0 30. Table 1. In this particular case. operators can and should minimize network infrastructure costs through tower sharing. primarily because VoIP and smart phone adoption is in its nascent stages. 6 . however. managed services. The introduction of data-centric devices has deflected the use of traditional voice and SMS services towards relatively efficient data platforms that are based on internet technologies. It should also be noted that. This article looks briefly at some of these trends and how operators globally are responding to the new data-centric dynamic. the introduction of VoIP to fixed line services is typically seen as a high-risk to revenues.OTT Services and the Implications for MENA Telecom Operators Over-the-top (OTT) services such as messaging. While OTT substitution is a potent threat to operator revenues. Doing so. This will also benefit the consumers in the long-run. IP (fils) SMS (per sms) DU Etisalat 18. OTT video content has the added benefit of boosting demand for higher capacity wireless and fixed line broadband services thereby increasing the combined value of operators’ subscriber bases.000 60. Limiting the growth of innovation in such an area. MENA operators are in a relatively strong position to offer regionspecific apps and content leaving ample scope for operator involvement in apps and platform development than other parts of the world.0 60. For example. Local International* IP (via 3G) * example: standard USA peak rate Source: Dubai Chamber based on Du and Etisalat portals Heavy data usage through OTT content. Table 1: Messaging in the UAE: Traditional vs. Middle Eastern operators are in a stronger position with respect to European operators.2 0. This is probably a high risk but nonetheless illustrative of the scope for opportunity for operators. one operator introduced deep-packet inspection last year to manage VoIP traffic with a view to potentially block or charge for the service.000 20. On the flipside there are no traditional equivalents of WhatsApp. Figure 1. Challenges Telecom operators globally have been facing a steady fall in the contribution of voice and short messaging services (SMS) to their revenues. One such example is subsidies for smart-phones. Some operators are thought to be facing financial challenges as a result of relatively slow growth in revenues and rising network costs due to a number of factors. network infrastructure joint ventures.000 80. In the Northern Europe. To overcome the increase in data usage. Beyond network costs Other than reducing costs by making networks more efficient. Implications Operators in the Middle East face challenges from OTT services. albeit with limited increases in revenue. including OTT services. has created a dynamic where telecom operators are facing cost pressures to existing business models. operators globally have attempted to adjust their pricing strategies in order to adapt to the new norm. which have different characteristics with regards to OTT content and how they deliver significant benefit to operators. This has been considered as good for business in recent years. Network sharing has thus become one way of achieving operational efficiency. they also present significant opportunities for operators who have adapted rapidly to the new norms. mostly due to the boom in smart phone adoption. Skype has the propensity to replace traditional voice calls but can prove costlier to the consumer if conducted over a 3G connection. music from Spotify or Deezer. Business Monitor International forecasts strong 3G and broadband subscriber growth across the Middle East and North Africa in the medium term.000 60.2 Voice (per minute)* DU Etisalat 30 33 212 212 450 450 Figure 1: Broadband and 3G Subscribers.000 20. Messenger services such as the popular Blackberry messenger (BBM) is one such OTT offering. OTT services can take a broader range of forms including substitutes for traditional services.or a combination of these measures across a geographic footprint. there are a number of other areas operators can address in the short-term. telecom operator can introduce their own VoIP or SMS IP services to meter traffic. As a way to harness the user experience. Telecom operators have been quick to respond to the ramping up in demand for data.