Steel producers in the Gulf believe Dubai's debt problems will shake bankers' confidence in funding new projects, while demand in the emirate is expected to drop further, steel producers said.

"In terms of getting financing for new projects, the situation was bad before and now it is very bad...banks are still trying to figures out how to deal with this Dubai World situation," said Abu Bucker Husain, chief executive officer of Al Ghurair Iron & Steel.

"Now is certainly not the right time to have plans for any expansions because the bankers are really not ready to lend money, and as a company we have no plans to expand now," he said on the sidelines of an industry conference.

Dubai's debt saga has shaken global investors since the emirate's Nov. 25 announcement it wanted a standstill on the debt of state conglomerate Dubai World.

"One of the biggest challenges of 2010 in Dubai will be for sure finding ways to finance new projects," said Andrey Parkhomchuk, sales director at Ukraine's steel producer Metinvest Holding.

Several construction projects linked to Dubai World's subsidiary Nakheel had been cancelled or put on hold, thus increasing the risk of lower steel demand next year.

"There is an added risk that demand will be lower in Dubai next year, but so far we have not been affected by Nakheel's situation," said Al Ghurair Iron & Steel's Husain.

He added that the company exports around 40 percent of production within the region and could further increase that percentage if demand in Dubai weakens.

Al Ghurair produces around 200,000 tons of galvanized steel per year.

Abu Dhabi's state-owned Emirates Steel Industries is going ahead with its expansion, which is planned to increase output capacity from 2 million tons to 3 million tons by 2011.

"We have nothing to do with what is happening in Dubai, we have already secured the funds needed for the project and things are going as planned," Hussein Al Nowais, chairman of Emirates Steel said.

In September, the company said it had raised $850 million from local banks and the Italian government while the rest of the financing for the overall expansion project will come from Emirates Steel's equity.

"In terms of demand in Dubai it was already weak since the crisis hit and now we are exporting to Jordan and Sudan not to mention demand in Abu Dhabi is still very strong," Nowais said.

As banks are expected to tighten lending for new projects, an alternative solution would be mergers and acquisitions, said Rama Ayman, managing director of the UK's Hatch Corporate Finance.

"There should be more mergers and acquisitions in the Middle East, but companies usually want discounts on assets and there is no proper way for valuation and this is a major obstacle," he said.

From the UAE, Emirates Steel was the only company that announced plans for acquisitions, to help boost capacity to 6.5 million tons by 2013-2014.

In October, Oman's Shadeed Iron & Steel said that Emirates Steel was in talks to acquire it, and expected a final contact to be signed by the end of November. No updates on the deal have been released since then.

Shadeed Iron & Steel, which is owned by Abu Dhabi-based Al Ghaith Holdings, has a production capacity of 1.5 million tonnes per year.

Due to  major inventory build up as a result of falling steel demand driven by the slowdown in Egypt's real estate sector, several steel companies have notified the Internal Trade Division of the Ministry of Trade and Industry that they will cease production until their inventory levels are back to normal.

The companies include Misr National Steel, Al-Obour Steel, October Steel and Meoufia Steel, though more producers are expected to send similar notifications.

Steel companies also attribute the inventory build up to the consistent flow of cheaper Turkish steel, which, they say, entered the market just as local producers were beginning to buy raw steel again following the recent demand slump.

Mohamed Abou Shady head of the internal trade division at the MTI told members of the media that the request is a tactical maneuver by local producers to prove to the government that steel supply is outstripping demand. He pointed out that the companies threatening halts in production imported 265,000 tons of steel so far 2009.

Since they have been unsuccessful in imposing an anti dumping suit against Turkish steel importers, Abou Shady said that the steel producers are trying to pressure the MTI to increase customs on imported steel. He said that the current state of the market is not a crisis but a result of a seasonal decrease in demand coinciding with reduced demand during Ramadan and the low season for new real estate projects.

Steel consumption and demand is growing rapidly in Middle East and South Africa under the support of the construction industry and government's infrastructure projects, George Matta, marketing director from Egypt's Ezz said.

Andrey Parkhomchuk, sales manager from Ukraine's Metinvest said that it is estimated that the steel demand will rise by 6 percent averagely per year in Middle East and North Africa in 2013. Supported by construction industry, long products were still the main consuming steel products with an average share of 65 percent.

Parkhomchuk stated that, driven by the package stimulus plan of governments , it is expected that the global GDP will increase 2.5 percent in 2010. Middle East and Asia will drive the economy to rebound, but the developed countries will see a stable revival until H2 of 2010. It is estimated that Middle East and South Africa will become the important strategic market.

The United Arab Emirates is expected to import as much steel from Turkey in 2010 as in 2009, with more than $40 billion still projected to be spent on construction projects despite the debt troubles at Dubai World, the head of Turkey's steel export association said.

"We are not worried about the [Dubai World] developments because there are some projects--over $40 billion--which will create some cashflow and will create steel consumption," Serdar Kocturk, chairman of the Istanbul Iron and Steel Exporters' Association, said in an interview.

“Dubai World is the leading player but there are also a lot of other players" in Dubai and the United Arab Emirates construction markets, he added.

The global financial markets reeled from the Dubai government's surprise announcement that it is seeking a six-month standstill on debt held by Dubai World, one of its flagship conglomerates, which owns troubled property developer Nakheel, the company that built the world's largest man-made islands.

Turkey accounts for about 90 percent of the UAE steel imports. The UAE is forecast to import about 2.4 million metric tons of steel in 2009, or 41 percent of its forecast steel demand of 5.9 million tons for the year, according to Egyptian steelmaker Al Ezz Steel Rebars Co.

Kocturk said he expects Turkish steel exports to Dubai will reach 2.2 million tons in 2009 and remain steady in 2010.  "We are not pessimistic" about the Dubai construction market, Kocturk said.

"There were some projects, not started but on paper. This won't be realized in the short term. But the already started projects, I think they will start again after restructuring this [debt] exposure," he added.

According to an industry estimate cited by news agency Zawya, construction projects in the UAE are expected to see a cash-flow of $47.65 billion in 2010.

Dubai's real-estate market tumbled following the onset of the global economic downturn, prompting construction companies to layoff workers and shelve non-essential projects.

Although Turkish exports to the UAE dropped 66% in the first 10 months of this year compared with the same period a year ago, the UAE is now the second-largest destination for Turkish steel exports after Egypt. Turkey is the largest exporter of long steel products to the Middle East.

Kocturk said the Turkish steel exporters' association expects steel exports to rise 5 percent to 10 percent in 2010 on the year. Preliminary forecasts show Turkish steel exports at 18.5 million tons in 2009 and about 19-20 million tons in 2010, he said, although the figures are very early estimates.