The steel industry has always been considered the bedrock for economic growth and development. The steel sector in the Middle East and North Africa (MENA) region has witnessed major transformations over the past years, as the Arabian countries try to emerge from the shadows of the developed world and become more industry oriented. Prior to the 1990s, the steel industry was dominated by governmental institutions, because the massive amounts of capital required and the strategic nature of steel as a commodity made it difficult for private investors to enter this sector. The entry of the private sector into the industry gradually shifted the focus of steel companies from creating profitability in the social sense to economic profitability. Today, companies referred to as "Dominating" make up the biggest part of local production, as these companies command relatively large market shares in their respective countries. Ezz Steel, the Saudi SABIC's Hadeed Company, Qatar Steel, and Libya Iron and Steel are among the region's major producers. The presence of market tycoon is not exclusive to companies in the MENA region; rather it is a trend that exists globally.

The Egyptian steel industry represents one of the cornerstones of Egypt's economic growth and development; due to its linkages to almost all other industries that stimulate economic expansion. The steel sector in Egypt consists of 27 producers. During the first nine months of 2010, Egyptian steel production grew by 14.7% to reach 4.66 million tons (mt), reinforcing the country's position as the largest steel producer in the MENA region and the second in the African continent after South Africa.Since most of the demand on steel in Egypt comes from infrastructural and housing projects, the majority of the production is dedicated to long products.

Egypt's domestic steel supply has been dominated by Ezz Steel, responsible for 45% of the country's long products and 43% of its flat products. The second largest private producer, is Beshay plant.Egypt's steel imports also increased as 16% of demand for long steel and 43% of flat steel were satisfied from offshore sources, mainly from Turkey. Due to the large market share that Ezz Steel commands in the Egyptian market, several monopoly accusations have been directed to the steel making mogul. The Company has been accused by many in the media of performing monopolistic activities, particularly price distortions. Certain ratios clearly indicate that the market is highly concentrated and that a small number of steel producers have tremendous influence on the market, and in turn on prices. Three local players capture a combined market share of around 80% of long products, the main steel type used in Egypt, implying a highly concentrated industry.

Due to the high level of concentration within the industry and the dearth of alternative products to rebars in the construction industry in Egypt, buyers have low bargaining power, while sellers have high tremendous influence over the prices of steel. In addition, the steel industry is a capital intensive industry, which means that barriers of entry are high. Moreover, the dominant position of Ezz Steel, coupled with the fact that steel capacities have exceeded consumption, discourages new investors to enter the sector, which further strengthens the position of the steel making cartel.

In January 2009, the Egyptian Anti-Competitive Supervisory Body declared that it has found no evidence to prove that Ezz steel, or any other steel producer in Egypt, has violated any articles in the anti-monopoly law. Hence, no action by the government was taken against the steel producers. Furthermore, the Authority recommended the government to grant more licenses for integrated steel plants to reduce costs. Steel production in Egypt has been on the rise over the past decade, as producers scrambled to meet the ever growing demand created by the real estate boom. The rise in production took off, as the industry cycle bottomed out and the fruits of previous economic reform agendas in the mid-1990s were being reaped.

In 2008, apart from a severe drop in production in July, steel production in Egypt followed the same trend that occurred worldwide. The industry entered the year strongly, driven by strong performances in the previous years and a mass sense of optimism and belief in economic development. Monthly production levels were high during the first half of the year, peaking on March to record 584 thousand tons. However, the industry took a hard hit during the second half of the year, due to the global financial crisis, and production levels dropped drastically, which was reflected in December's output of only 380 thousand tons. Total steel production in Egypt in 2008 amounted to 6.20mn tons, representing a 0.4% drop compared to the previous year, where total production reached 6.22mn tons. However, with the beginning of 2009, monthly production started to rise, in response to the healthy local construction sector. Steel output in May 2009 reached 453 thousand tons, rising by 19.2% compared to December 2008. Nevertheless, the influence of the world financial crisis is illustrated in the 22.4% drop in steel production in the first five months of 2009, as opposed to that of the same period in 2008, before the crisis took place.

The prices of raw materials and semi-finished steel products, represented by scrap and billets, followed the same trend of international prices. In June 2008, when the construction sector in Egypt was still in its best performing stages, average prices of scrap and billets in the local market reached their maximum, as they amounted to LE3,761/ton and LE6,099/ ton, respectively. After the crisis, prices plummeted considerably, as scrap prices reached LE1, 493/ton by the end of the year, a 60.3% decline, compared to June 2008. Billets prices followed suite, plunging by 56.4%, to reach LE2, 661/ton.

As the financial crisis is still prevailing worldwide, prices did not witness a rebound yet, although they are starting to incline. As of July 2009, average scrap and billets prices were LE1, 534/ton and LE2,442/ton, respectively.

Steel is a necessity for different sectors of the Egyptian economy, such as construction. Moreover, it is capital intensive and has an inelastic demand. Quantity demanded in 2007 was 219.38 tons at Price of 3220 LE/Ton; while Quantity demanded in 2008 was 242.288 tons at Price of 4530 LE/Ton. Than Elasticity of Demand = 0.0167. On the other side elasticity of Supply is 0.0145. Repeating the elasticity during the year 2008 and 2009 calculation proof the inelastic respond to the change in price, where elasticity of Demand was 0.7 and elasticity of Supply was 0.4.

The steel industry in Egypt has, due to the vitality of the product, been shielding itself from the high volatility of the industry's raw material costs and committing itself to a growth strategy both domestically and regionally.

Questions:

2.  Describe the role of the steel industry on the economic growth. 
4. List the factors affecting the demand and supply in the steel industry.
6. Interpret the meaning of steel demand and supply elasticity.
8. Consider the role of the government in improving the market outcome. Use the steel industry case to provide policy makers with advises for better performance.

Answer rating: 100% (QA)

Role of the steel industry in economic growth The steel industry plays a critical role in the economic growth and development of countries particularly in regions like the Middle East and North Africa ... View the full answer