Kef Holdings ready for recovery in Sharjah

Sharjah, one of the seven mini-states of the United Arab Emirates, has little oil to speak of itself, but Kef Holdings, based in the emirate’s Hamriyah industrial zone, plays an important part in the Gulf’s hydrocarbon industry.

Kef Holdings started out in 1995 as Emirates Techno Casting, a scrap-metal dealing business, but its industrial foundries now produce pure-steel juggernaut valves, which can weigh up to 45 tons, for the regional oil and gas sector. These valves can cope with the high pressures under the Earth’s surface, and typically make up 8-12 per cent of an energy project’s total costs.

The annual global valve industry is worth roughly $18.5bn, according to estimates by Kef Holdings. For much of the past decade, it was a good business niche in the Gulf. Soaring energy prices spurred vast investments in oil and gas projects as governments tried to build capacity.

However, the financial crisis sent oil prices plummeting, and made the Gulf governments reconsider many of their more ambitious energy projects and try to negotiate cheaper deals with contractors. This had a painful knock-on effect for companies such as Kef Holdings that relied on government contracts.

“Last year was a tough year for most oil and gas companies,” says Faizal Kottikollon, chairman and founder of Kef Holdings. “Valve prices fell globally as material costs – mostly steel – fell, and the industry as a whole discounted its products to keep factories open.”

As projects in Saudi Arabia and Abu Dhabi were delayed, revenues fell by roughly 30 per cent last year, according to Mr Kottikollon. That would indicate sales of about Dh294m ($80m) according to previous company reports.

Though profits also dipped, Kef Holdings managed to avoid any red ink by cutting costs, and was also helped by cheap access to two key components in the forging process – high-quality scrap steel from Dubai construction sites, and silica sand from Saudi Arabia.

Mr Kottikollon says he senses an incipient recovery. Various oil and gas projects, particularly in Abu Dhabi and Kuwait, are approaching fruition, and Kef is working through a Dh370m backlog of orders. “We hope the entire Middle East will come back in 2011,” he says.

Kef Holdings expects sales to rebound to Dh600m-Dh700m next year, when the first $30m phase of a Saudi-based foundry will start production. An Indian plant started production last year.

The company still faces some uncertainty relating to ownership. Dubai International Capital, a private equity group owned by Dubai Holding, one of the emirate’s troubled conglomerates, acquired a 45 per cent stake in Kef Holding in March 2008 for roughly $130m. But given the financial difficulties of the investment fund and its parent, it is uncertain whether DIC will be able to hold on to Kef Holding.

“We remain committed to our investment in Kef,” DIC says. “It is a well-run and well-positioned business that we believe has a strong future.”