How Globalization and Regional Economic Integration Affects Emirates Steel Company - Article Example

How globalization and regional economic integration affects Emirates Steel Company Course Title: MBA - ECON 605 Student Name: Cohort number: Name of organization: Emirates Steel Company Table of contents 1.0 Introduction 2 1.1 Background: Emirates Steel Company 2 2.0 SWOT Analysis 4 2.1 Strengths 4 2.2 Weaknesses 5 2.3 Opportunities 6 2.4 Threats 6 3.0 Conclusion 7 References 8 Appendices 9 1.0 Introduction Regional economic integration is an agreement between groups of countries to ultimately remove or reduce non-tariff and tariff barriers in a geographic region. This integration allows for flow of factors of production between each other as well as free flow of services and goods1. Countries, under regional economic integration, have been able to encourage trade between neighbors and focus on issues relevant to their development stage. The common types of regional economic integration are free trade area, customs union, common market and economic union. In 1981, the Arab States engendered the Gulf Cooperation Council (GCC) with six member states; United Arab Emirates (UAE), Qatar, Oman, Saudi Arabia, Bahrain, and Kuwait. Through reduced barriers to entry and consistent investment criteria and trade, the GCC and global businesses have benefited from the regional trade agreements2. Steel manufacturing companies that opt to manufacture in one country find it cheaper and easier, in a trading bloc, to move the goods between member countries without additional regulations or incurring tariffs. Given the diffusion of technology and changing costs, western nations can no longer dominate the steel industry; hence, developing countries with favorable government policies are experiencing high growth3. The steel industry exhibits not only significant political, strategic and economic importance but also remarkable entrepreneurship and technological dynamism. In 2008 and 2009 economic recession, steel export capability reduced because of decreased total output and domestic demand. As a result, the countries were forced to increase export through capital outflows4. The availability of coal and iron ore dictates the geographical location of steel mills. Fortunately, neo-liberal policies and globalization have increased mergers, and privatization of state firms, cross-national investments and steel trade. However, subsidized steel imports are still perceived as hypocritical since slow industrial adjustment is inhibited by bailouts of firms and trade barriers. Nonetheless, higher steel prices benefits shareholders rather than workers and results in protectionism with potential job losses. 1.1 Background: Emirates Steel Company Emirates Steel was established in 1998 and is the largest industrial conglomerate owned by SENAAT in the United Arab Emirates. The company is the driving force behind the implementation of industrial diversification policy in Abu Dhabi. Steel plant uses the latest rolling mill technology to produce heavy sections, wire rod and reinforcement bars. Following the investment of $3billion (AED 11 billion) and two expansions, the company started to produce a capacity of 3.5 million rolls per annum. The company employs over 2,500 workers and intends to be a world class steel manufacturer for quality products5. To reduce financial risks, the company is significantly and continually investing in expansion of information technology, manufacturing and processing. The current investments in sustainable technology has increased safety for workers and customers, reduced the environmental footprint of the company and helped to improve service and product quality. The company, due to low capacity utilization, is revisiting its optimization models by focusing on value-added products. Although it faces the challenges of smaller production campaigns and higher setup times it claims a wider marker for its value-added steel. Recent developments of the steel firm involve diversification into building offshore oil rigs in the oil and gas sector. On the same note, a new structural steel is being supplied by the company for the offshore oil and gas structures. The MENA region is served largely by imports and the entry re-establishment of Emirates Steel steepens the competition for a larger share of the heavy sections market. By 2018, demand is expected to reach 2.65 million tons for structural steel in the GCC region as opposed to 3.85 million tons for the whole of Middle East6. The company is strategically positioned to supply of high-value steel products for nuclear plants by collaborating with Emirates Nuclear Energy Corporation. The progress of UAE is attributed to a larger extent to steel production as a form of accelerated growth of non-oil based gross domestic product and support to rapid construction. Emirates Steel in August 2010 closed the financing of its $2.5bn expansion project with $600m of subordinated working capital facilities and $1.6bn of senior debt facilities7. “…other than being provided by domestic population base, local firms should operate on economies of scale that call for larger global markets”8 Emirates Steel has strong government support since it is indirectly owned by the Government of Abu Dhabi. Using proven technologies, the plant is highly competitive in nature in addition to the synergies associated with Phase 1 and 2 expansion projects and substantial economies of scale9. For almost 10 years, Emirates Steel has been selling and producing steel making the production facilities a world-scale asset10. Moreover, the company has employed highly qualified personnel and use of state of the art technologies to gain considerable expertise in steel milling. Strong customer relationships and record production levels has been boosted by regional and local steel traders and end-users. Nonetheless, restructuring of the global steel industry, the global financial crisis, and the announcement of a second phase expansion has delayed a multi-sourced financing11. 2.0 SWOT Analysis 2.1 Strengths Favorable profitability: In 2014, the revenues of Emirates Steel rose to $1.8billion despite excess steelmaking capacity, continuing volatility of raw materials costs and sluggish demand levels in the world market12. This was closely attributed to increase in long products production (12 percent) for wire rod, structural steel and rebar. Expertise and human resource capabilities: The Company has a strong body of 2,500 workers with specialized knowledge and skills in steel milling techniques13. They are highly motivated with good remuneration and reward systems. Functional leadership style has enabled communication and problem solving within the various departments. The company is also producing own bespoke sheet pile designs to meet standards such as S430 GP, S390 GP and EN S355 GP14. Employees are also awarded with CEO awards for work accomplishments and exemplary contributions. Technology and standards: The firm uses state-of-the art technology in steel milling and reinforcement bars manufacturing. Company-wide training has been carried out to equip workers with efficient methods and systems. By using the current DRI technology, it becomes a first class rolling mill and a leader in long products now and in future. This level of quality and certification to British Standards as well as winning a SKEA Gold Award demonstrates sound operating performance. Financing: The Company has an adequate financing mix which ensures smooth funding of its operations and capital expenditures. In 2012, it used $3billion to expand into areas such as information technology systems, manufacturing and processing15. This investment has facilitated production of bearing files, columns and parallel-flange beams of 430mm depth, 419 flange widths, and 914 mm web depth16. The Company will also be able to compete with Hadeed, the region’s biggest steel producer, in production of more than 6 million tons of steel per annum. Product design and marketing mix: Emirates steel is producing a range of items such as reinforcement bars, wire rods and heavy sections. The presence of an integrated steel plant has enabled improvement in product quality. Upgrading technology to move to high-value products will allow for greater penetration of overseas markets and value-added steel. With efficient distribution networks to service clients, the company has to maintain superior quality products. Management board and employee diversity: The Company has diverse board members who bring in extensive experiences and expertise. Inclusion of employees from different backgrounds such as religion, race and age brings in competitiveness and appeal to the international customers. Political support: Emirates steel is indirectly owned by the government of Abu Dhabi. With financial and marketing support from the government, the company has been able to venture to European and American markets. Recognition from research and technology arm of Malaysia has also given the company a new license to increase production of 8mm-16mm rebar coils, value-added wire rod grades and structural steel17. Favorable credit rating: Close relationship with Islamic banks as well as conventional loan lenders puts the company at a position of favorable liquidity. With good terms and conditions, the company has been able to acquire various loans without restrictions. 2.2 Weaknesses High employee turnover: Overreliance on expatriate labor causes inconsistencies and work flow problems. Since most of the employees originate in the Indian and African sub-continent, it raises numerous nationalization and patriotic issues18. Despite the technical skills training, local Emiratis have not taken up the administrative and operational jobs. Inefficient methods: Current use of preheating systems is costly as it consumers a lot of power. There are plans to use continuous strip production that is intended to boost yields in the rolling process and reduce energy usage. Health and safety: Emirates steel is still faced with challenges of heat-related illness which lowers productivity and increases compensations and claims. This calls for the company to create awareness on heat stress management and mitigation of heat risks. 2.3 Opportunities Demand for steel: In the last decade, demand for steel in the UAE has grown extensively. This has been triggered by rapid infrastructural developments, growth in the real estate sector and the construction boom. MENA region alone has $4.3trillion worth of construction projects which improves the stability of the company in terms of production19. Global footprint expansion: Emirates Steel became the first company in the UAE to export steel to the Americas besides Africa and Asian sub-continent20. This allows the company to leverage its experience and secure further growth. Strategic location: UAE is well positioned in terms of strategy, geography and technology to lead in steel exports to US, Europe and beyond21. Besides, the company has identified required product grades and exact requirements. Collaboration and partnerships: The Company is looking forward to partnering with Masdar in the production of energy-efficient steel and capturing carbon dioxide at a mass scale22. It also has the potential to boost its environmental credentials in the third phase of expansion. Better technologies and innovation: Aggressive innovation is needed to lower unit costs and increase production. Research and Development (R&D) provides a strong business case to use the latest technologies in production, ordering and shipment. The firm aims at capturing, reusing and storing up to 0.8million tons of carbon dioxide which is about 55 percent of CO2 generated by the company23. 2.4 Threats Falling prices: The presence of cheap steel from Turkey and China is dampening future development plans from UAE steel industry24. Unless the nation call from protection against unfair trade practices, expansion and investment in steel is at risk. Cheap exports and dumping: Many steel producers in the UAE risk losing capacity which in turn affects economic diversification from oil and gas sector. When anti-dumping duties are introduced, it will help to deter the low quality Chinese imports. In 2014, Chinese exports to the UAE increased by 63 percent and by January 2015 it had grown to 186 percent25. Unionization of workers: Consistent struggle by workers unions to agitate for better remuneration and working conditions for steel workers globally will impact on the performance of Emirates Steel26. This will mean that the company will cede ground for negotiations while at the same time demanding increased performance for better pay. 3.0 Conclusion The analysis has found out that Emirates Steel has potential to become one of the leading steel companies in the UAE and the MENA region. With advances in steel rolling technology, the company is able to advance in meeting the demand in the region. However, cheap steel imports from China and Turkey are dampening the chances of the company becoming a steel giant in the region. There are calls to tighten anti-dumping laws through reinforcement so that local companies are protected from unfair trade practices. The company is positioned for growth in terms of technology, human resource capacities and modern rolling plants that is consistent with the current needs of the construction market. Nonetheless, safety and health issues still curtail the reputation and image of the company as a safe place to work. With increasing cases of deaths, injuries and ill-health resulting from heat burns, the company has to invest in health risk awareness. To meet increasing demand for value added products, Emirates steel is investing $3billion over the next three years to produce first class products for European and American markets. With the GCC in place and regional market integration, the company is well positioned to take advantage of mass production of steel to meet the needs of construction projects such as airports, real estate, railways and roads in the Middle East. Collaboration and partnership with other companies within the Asian pacific trading bloc, EU and GCC reduces trade restrictions and increase in tariffs. Falling prices and rise in demand by workers unions may slow down production of steel but the company needs to strategically position itself for higher valued products in new markets. Economic integration and market consolidation is one of the key pillars that will allow Emirates steel to maximize production efficiency and curve a niche for its high-end products. References 1. Cole, Kati; Lyons, Russell; and Cary, Deborah. "Regional Economic Integration." The Review: A Journal of Undergraduate Student Research. 2 (1999): 70-76. Web. [October 15, 2000]. 2. Tayebi, Seyed and Ramezani, Fariba. “Financial Crisis and Steel Trade Integration in Asia and Pacific: A Static and Dynamic Analysis”. International Journal of Business and Development Studies. 3, no. 1(2011): 5-28. 3. Manzella, John. The impact of globalization, trade agreements and emerging trade blocs on US industry. January 1, 1998. The Manzella Report. 4. Emirates steel. Who we are. February 2016. http://www.emiratessteel.com/ 5. Al Romaithi. “Consumers are shifting to premium steel as it guarantees optimum returns on their investment”. Abu Dhabi, United Arab Emirates, 19 August 2014. 6. Ibid 2014. 7. Wam, Newman. Emirates steel expansion complete. September 26, 2012. 8. International Financing Review. “Innovative Emirates Steel”. Thomson Reuters. 2010. 9. Al Bawaba. Emirates steel calls for action to face increasing competition and falling prices. April 20, 2015. Albawaba business. 10. UAE interact, 2013. Emirates steel dispatches first shipment of structural steel to United States. News and information on the UAE. 11. Emirates steel industries. Steel talk. Newsletter 2014. 12. Arnold, Tom. “Emirates steel invites phase 3 bids”. September 6, 2011. The National. Appendices Figure 1: Steel trade integration (Tayedi & Ramezani., 2011, p.9) Read More