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Contractor contains price hikes
High steel prices have left oil and gas contractors
facing significant challenges. It's not just a question of getting
hold of just any steel, it has to be the right grade. With much of
the high-grade steels available being consumed by Korea, China and
Europe, companies have to be alert to the lower quality steel
entering the market.
"We use relatively high-grade marine quality steel for most of our
operations," said Peter Marler, vice president and general manager
of business development for J Ray McDermott Middle East, one of the
region's largest offshore contractors, which recently celebrated 20
years in the UAE's Jebel Ali Free Zone.
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"There is a lot of
construction work under way,
and there is a huge ramp-up
in capital expenditure,
particularly by oil
companies and the ship
building industry, and that
has consumed a lot of
high-grade marine steel."
"Steel mills that produce
high-grade steels are not
committing tonnage to
stockists in the UAE
market," said Marler. "There
has been an emergence of
Brazilian, South African and
Ukrainian steel, all coming
into the local market. And
that does not typically meet
our higher-grade
specifications, so we cannot
buy it. We have to buy from
the mills direct or
stockists in other parts of
the world that actually hold
our grade material."
This can sometimes lead to
the company paying more for
its steel, but J Ray
McDermott has made
significant efforts to
protect itself from the
impact of price
fluctuations. In fact the
company set up a steel group
whose only responsibility is
to monitor and forecast the
price of all the ferrous and
non-ferrous materials that
it uses in its operations.
"For many of the projects we
work on we have to provide a
lump sum turnkey bid, where
we are responsible for
procuring all of the
materials," said Hafez K.
Aghili, company president.
"We try and do this as best
as we can by examining
industry publications and
talking to steel suppliers,
to try and get an indication
of where the market is
going.
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The company has enjoyed
roughly 10 years of zero
growth in steel prices until
about three or four years
ago, when it started to see
an increase. Since it has
put the steel group in
place, the company says the
contingency plans it has in
bids are actually stronger
than they used to be,
because of the
unpredictability of the
market.
"A good example is the ship
that recently run aground in
the UK," said Marler. "It
was carrying 1000 tonnes of
nickel, which actually
represents about 25% of the
world's nickel stocks. So as
a result, the price of
nickel has shot up by US
$10000 a tonne just over
that one incident. We are
isolated from that because
of the commitments we have
got in place, but it just
goes to show how small
things can very seriously
impact the price of steel."
The company's predictions
for steel price movement
over the next twelve months
depend on the grade of steel
in question. It agrees with
a general consensus that
prices of lower grade steels
are going to slow down,
while the demand for
higher-grade steels will
continue to keep prices
buoyant. The company takes
measures to protect itself
from dramatic shifts in
commodity costs.
"On some contracts we get
price escalation protection,
but it isn't the norm," said
Marler.
"It isn't something
customers would tolerate. We
factor our own escalation
expectations in and we have
typically done slightly
better than our predictions,
as the market hasn't been as
strong as we expected it to
be. But that's a swings and
roundabouts situation, you
win on some, you lose on
others."
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