Oman Research
Al Jazeera Steel Products Co.
Building material (Steel) ~ Visit Note
Export oriented business model Al Jazeera Steel Products Company (AJTM) converts primary raw material such as hot rolled coil and billets into pipes and useable forms/shapes, primarily catering to the construction industry. The main plant is the 300k TPY pipe mill but a newly commissioned merchant bar mill with a similar capacity of 300k TPY is set for commercial production in Q409 after encountering delays. Domestic market accounts for just 20% of total sales, whilst the neighboring UAE is the largest destination market, accounting for c35% of sales. Managing the steel cycle is the key to profitability AJTM was hit hard by the global economic downturn during the later part of 2008 and the first half of 2009 following a tumble in steel prices and collapse in the regional construction market. Besides, the lead-time between procurement of raw materials and invoicing of sales, typically a period of 12 weeks additionally exposed the company to pricing risks. These two factors caused volatility in performance and inventory overhang. Over Q408 and Q109 EBITDA averaged at a negative $370/ton compared to an average of $122/ton in Q209 and Q309. Volatility is part and parcel of operating in a cyclical industry Essentially AJTM’s business model, which is exposed to inventory stocking cycle of dealers, could display a trend, which would differ from a usual user-exposed business model. In the short to medium term, raw material volatility would swing revenues and volumes as the dealer chain stocks up or draws down convinced about the direction of price movement. In a way for AJTM the impact of an expected upturn in demand is pre-poned due to its exposure to dealers. We concentrate on volume growth, as price development, which would be a function of raw material prices is difficult to project. End use consumption unsustainably low due to temporarily low demand levels AJTM’s capacity...