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AmerCable Incorporated

MEEF - Middle East Engineering Projects News & Releases - previous page

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.


"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.


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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