CONSTRUCTION Set fair for strong growth

07 July 2006

As the Gulf construction boom enters its fourth year, there is little sign of any slowdown in activity. If anything, the rate of growth is increasing, as governments and private developers continue to plough billions of dollars into the region's physical infrastructure, delivering increased volumes - and profits - for Gulf contractors.

According to the latest data from Gulf projects tracker MEED Projects, the total value of projects in the Gulf topped $1,100 million at the end of June 2006, with projects in the GCC breaking through the trillion-dollar mark for the first time. The figure represents an increase of more than 70 per cent in projects planned or under way across the Gulf in the past 12 months (see Databank, page 63).

Despite predictions last year that there would be a slight cooling in activity in 2006, the MEED Projects' data shows activity is accelerating strongly, with contractors in the GCC enjoying a 29 per cent increase in projects in the second quarter (Q2) of 2006 - up slightly on the same period in 2005 (see table). The Q1 figures show a similar pattern, with a 14 per cent increase in project activity in the GCC compared with a 9 per cent rise in the corresponding period in 2005. If this year-on-year increase in activity continues, the GCC construction industry can look forward to a 66 per cent increase in project activity in the second half of 2006, with the total value of projects in the Gulf ending the year close to $2,000 million.

With most energy analysts forecasting oil prices to remain at $50-60 a barrel over the coming two-three years, it is unlikely there will be any let-up in project activity in the Gulf in the foreseeable future. 'Construction activity is likely to continue climbing strongly for at least the coming two years,' says Steve Coates, Gulf Director of the UK's Davis Langdon, which has five offices across the region. 'The amount that is being spent on property developments in the Gulf is unprecedented. And from what we are seeing in the UAE, Bahrain and Qatar, it is continuing strongly.'

The boom spells good news for contractors and consultants in the region, which, with full order books, are in the unusual position of being able to cherry pick the projects they want to bid for. Some contractors are shying away from landmark schemes in order to concentrate on less complicated projects that can deliver better returns. 'We are not really interested in the unique projects,' says one Dubai-based contractor. 'Because everyone wants to work on them, the client thinks he can get everything on the cheap. We'd rather concentrate on buildings that we can build and make a profit. This is a business after all.'

According to industry sources, contractors in the Gulf's construction hotspots are enjoying a steep rise in profit margins, particularly in the more specialist sectors where the reduced competition is frequently delivering profits well above 10 per cent.

But it is not allplain sailing. The boom is putting severe strain on the region's supply chain and chronic shortages of resources are driving up the cost of construction across the Gulf. The first half of the year saw across-the-board price rises for construction materials, particularly in key commodities such as reinforcement steel (rebar) and cement (see table).

Despite a slowdown in the steel markets in the second half of 2005, rebar prices climbed to record levels in June on the back of rising demand in the US and Europe. According to research carried out for MEED by Davis Langdon, rebar in the UAE cost about $685 a tonne in June - a 25 per cent increase since the start of the year. Shortages in local supplies are also behind price rises in cement and aggregates, which have in turn pushed up the cost of ready-mixed concrete. The threat posed by the shortages has led to government action in some places in an attempt to take some of the heat out of the some markets. In April, Du

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