Qataris In For Largest North African Steel Plant
BMI View: Qatar International's involvement in the construction of a US$2bn steel plant in Algeria underlines the increasing GCC investment into North Africa, and also a burgeoning demand for building materials within the country. The interest of foreign, notably Gulf-based investors in North Africa's building materials market represents a phenomenon that we are also noticing in the infrastructure sector; namely, an increasing interest in gaining first mover advantage regardless of the risks inherent in the North Africa region.
Under the terms of the deal, Qatar International (a joint venture between Qatar Mining and Qatar Steel) will hold a 49% stake in the Bellara complex located in the eastern city of Jijel. Algerian national producer Sider (Entreprise Nationale de Sidérurgie) will retain the remaining 51% share. The first phase of the build is expected to begin in 2013, and cost US$2bn. The joint venture (JV) has announced that it plans to put out at least 2mn tonnes per annum (mtpa) of steel from the plant by 2017, rising to 5mtpa in the final phase - making it potentially the largest producer of steel in the region.
|Investment To Curb Supply Fluctuations|
|2012 Monthly Crude Steel Output, Metric Tons - Algeria, Morocco (LHS), Egypt (RHS)|
The plant reflects the growing demand for building materials in both Algeria and North Africa in general following the 'Arab Spring'. Political instability fomented by economic imbalances has encouraged new and old regimes alike to up investment in national infrastructure, ending decades of stagnation and creating a new drive in construction material output. Despite this, AcelorMittal are the only major steel producer in the country. The international major owns a 70% stake in a plant in Annaba, also in the east of Algeria, and has a total output capacity of 2.6mtpa - currently the largest plant in North Africa.
A long-run dearth of supply has seen Algeria rely on annual imports of nearly US$10bn worth of iron and steel products, according to the Algerian Ministry of Industry. This figure represents around 20% of the country's entire outgoings on imports - and, without a concomitant rise in output, is on course to increase as the construction industry grows. In November, Algerian state backed energy major Sonatrach announced that they planned to invest over US$80bn in Algeria's oil, gas and electricity infrastructure. The government has also called for international investment in a plan to garner US$18bn to construct 2.4mn new homes by 2014. A significant amount of the output from the Bellara plant is expected to support a renewed rail infrastructure drive.
Algeria has an established mining industry, with significant iron ore deposits and export terminals on the East coast around Annaba. Sonatrach have long eyed the Gara Djebilet field, rumoured to contain 2,000mn tonnes of medium grade ore - the largest in the Arab world. If feasibility studies are successful, it is rumoured that the firm will look to create a steel plant with an output capacity in the range of 5 to 10mtpa.
|Selected North African Countries - BMI Construction Industry Forecast, % Real Growth, Y-O-Y|
The involvement of Qatari sovereign wealth reflects a wider battle between investors for a share of the lucrative North African infrastructure space as countries look to bolster residential and infrastructure capacity. Aside from Algeria, we expect Morocco, Tunisia and Libya to continue reversing decade-long trends of underinvestment, and funds have been lining up to gain entry to these markets. With American and European majors facing serious liquidity crises, oil-rich Gulf Cooperation Council (GCC) sovereign wealth funds are, in our opinion, incredibly well placed to capitalise on the new socio-economic status quo. Indeed, the current levels of GCC investment far outshine the European Bank for Reconstruction and Development's (ERBD)pledge of US$1.28bn in May for Egypt, Morocco, Tunisia and Jordan.
Qatar itself has been leading an investment drive into the North African telecom sector plus a range of other industries. In April, Qatar offered neighbouring Tunisia a US$1bn low interest loan to be put towards repairing and upgrading infrastructure damaged during the Arab Spring upheavals. We recently highlighted an investment drive by Gulf funds into North Africa's tourism industry (see our online service, September 4, 'Gulf Investors In For Tunisia Resort') - aside from the US$308mn Tunisia project, investors from Kuwait, UAE and Qatar have recently signalled that they are to put US$2.5bn worth of investment into Morocco's tourism industry, with projects being eyed in the Ouazazate region.
Shortly after this, we observed that Qatar had committed a huge US$18bn worth of investment to Egypt as part of the mass development of the Sinai region (see our online service, September 7, 'US$18bn Investment Kicks-Off Mass Suez Development Plans'). The trend is also evident in the energy sector - Abu Dhabi's TAQA secured US$1.4bn in financing for the expansion of its Jorf Lasfar coal-fired power plant in Morocco (see our online service, June 21, 'US$1.4bn Boost TAQA's Regional Power Prospects'). In May, Qatar Petroleum committed US$2bn to a long-dormant Skhira oil refinery project in Tunisia. Recently, a consortium led by Saudi Arabia's ACWA Power won a US$1bn contract as part of Morocco's 2000MW solar power drive.
|Gaining From North African Growth|
|Industries Qatar - Share Price Performance, Year-To-Date|
Over the past decade, the growth of steel production in GCC countries has significantly outperformed that of North Africa. Companies such as Qatar Steel have benefitted from domestic construction booms to expand into regional markets. Aside from the company's core operations at its Mesaieed Industrial City plant, Qatar Steel also run a UAE based subsidiary, Qatar Steel Company FZE. Reflecting the muted demand in the UAE's market, Emirates Steel Industries dropped its rebar price by US$ 40 per tonne month-on-month in October, thereby demonstrating the benefits to GCC producers of diversifying into more profitable markets. Indeed, despite noting ongoing political risk, we believe that the North African building materials sector will remain a safe haven for investors looking to capitalise on growth (see our online service, October 29, 'Political Risks On The Rise').