An expected rise in scrap steel will boost the competitiveness of Egyptian steelmakers, which rely on direct reduced iron (DRI) for feedstock, BMI's latest “”Egypt Metals Report Q3 2010” said on Friday. In Q110, Egyptian crude steel output grew 11.3 percent year-on-year (y-o-y) to 1.45 million tons. However, the quarter-on-quarter (q-o-q) rate of growth had slowed to just 0.7 percent, compared with 2.9 percent in Q410. Having reached a monthly level of output of 517,000 tons in December 2009 - indicating that the industry was operating at pre-crisis levels - production fell back to an average of 485,000 tons in Q110. Nevertheless, compared with the steel industry worldwide, Egypt is faring relatively well. BMI expects price stabilization in H210 to lead to a recovery in local demand, but price volatility in longs products suggests that producers will find the going tough over the short-term. The country has been operating well under full capacity, with a utilization rate of just 65 percent of its full 8.8 million tons per annum (tpa) potential. Even without further expansion of capacity, Egypt has the potential to grow by over 50 percent using plants currently in operation. The industry is highly vulnerable to lower-cost production from elsewhere flooding the market. The ability of local producers to achieve sustained production requires higher steel prices. In Q210, the price of steel imported from Turkey, Poland and the CIS was up to 5 percent lower than domestically-produced steel, leading to sharp drops in local production. Local producers predominantly use DRI with iron ore supplies' prices tied to longer-term contracts. Manufacturers whose main input was scrap, like Turkish importers, have been able to adapt their production process in shorter time periods and react more quickly to fluctuations in input prices, transferring cost reductions to their customers and gaining market share. While this benefited those foreign plants that used scrap as feedstock during the recession when it was cheap, the economic recovery will start to benefit local producers. As of April 2010, Ezz Steel claimed that iron prices were EGP300 per ton cheaper than neighboring countries, despite large hikes. Consequently, Egypt will be able to leverage a cost advantage over H210 and into 2011. BMI expects crude output to grow 22 percent to 6.44 million tons, almost the same level as 2008. Thereafter, annual output growth should continue to be sustained at 10-14 percent, with 2014 volumes set to exceed 10 million tons. Although this represents a 95 percent increase over 2009 estimates, it will still not be enough to cover domestic demand, which is set to grow by nearly 70 percent to around 12.43 million tons in 2014. A significant threat is the surge in steelmaking capacity in Saudi Arabia, which saw its steel output rise by 41.6 percent y-o-y and 9.9 percent q-o-q to 1.33 million tons in Q110. The rapid increase in Saudi output has contributed to the 14.4 percent growth in Middle East production, which is outpacing consumption, the report said. BMI forecast 10 percent growth in Middle East consumption in 2010. While Saudi Arabia continued to require rebar imports to satisfy demand from the construction sector in H110, traders suspended import purchases while they waited for the cancellation of a 5 percent import duty on steel products. This helped depress Egyptian exports, although BMI expects the situation to improve in H210 as Saudi traders resume purchases. Egyptian steel is heavily influenced by developments in the Middle East and the expanding role of the Saudi steel industry is a significant challenge to its market position. Although Middle Eastern steel output is unlikely to exceed 20-25 percent of its total consumption requirements over the medium term, producers had been banking on a swift upturn in the regional market for recovery. Capacity growth poses a significant challenge both in terms of volume and price.