Coping with material shortages and capacity constraints

10 February 2006

Every three years the global construction industry converges on Munich for Bauma - the world’s largest equipment fair. In 2007, the exhibition will focus specifically on the Middle East. While the event may not be of great importance to those working on the region’s many building sites, it does highlight one key fact. The Middle East is now an integral part of the global construction industry.

Unlike previous rapid periods of growth, the region’s current construction boom has lasted longer than many thought possible, and in 2005 the market went from strength to strength on the back of sky-high oil prices. The outlook for 2006 looks equally buoyant across most sectors including infrastructure, building and dredging. According to MEED Projects, the total value of projects in the GCC has more than doubled in the past year to $683,188 million from $300,497 million.

Saudi Arabia looks set to grow the fastest. The kingdom has embarked on a number of major projects, including the $26,670 million King Abdullah Economic City and mass housing schemes, as well as continuing urban development programmes in major cities. These projects, together with demand from the ever-growing oil and gas, petrochemical and industrial sectors, will put more strain on local capacity than ever before.

Renewed vigour

Activity in Dubai looks set to continue, with a number of key developments ramping up over the next year - including Nakheel’s $40,000 million Waterfront project and the $20,000 new Jebel Ali International Airport development. With renewed vigour, Abu Dhabi has started to develop numerous large-scale mixed-use developments, and construction activity will accelerate on mega-projects such as Al-Reem Island, Saadiyat Island and new conurbations such as Sheikh Mohammed bin Zayed City.

Things look equally optimistic in Qatar. Work will kick off soon on the $5,000 million Lusail project with a $400 million infrastructure package, more packages will be let on the New Doha International Airport and building work will accelerate on the Pearl-Qatar. A host of smaller projects will also come on stream, including individual tower projects and various major road and infrastructure schemes.

Despite the general feeling of optimism, such extraordinary growth is coming at a price. Countries around the region, especially in the Gulf, are now experiencing constraints on almost every level as clients try desperately to deliver their projects on time and within budget. While in recent years the market has largely been concerned with cost, other issues will grow in prominence in 2006. Resource availability and logistics are beginning to creak under the sheer volume of projects under way. According to figures compiled by MEED, $28,817 million of major contracts were awarded in 2005, and a similar figure is expected for 2006.

The clients’ vision may be unlimited, but the capacity of the region’s contractors is constrained. Although contractors have expanded their operations to meet the demands of developers, the number of capable firms is finite. The problem is most acute in Dubai, where contractors are becoming increasingly selective and are in many cases unable to take on more work even if they wanted to. The rest of the region is following suit. Projects in Qatar have struggled to attract bidders and developers in Abu Dhabi are exploring alternative contracting strategies to entice contractors to participate in their projects.

Premium charge

In a region renowned for slim margins, leading contractors now have the opportunity to charge a premium for their services. Few contractors release financial details, but one exception is Dubai-based Arab Technical Construction Company, which owns Arabtec Construction. It posted a 125 per cent increase in net profits for 2005.

But with premiums comes added risk. The projects in the Middle East have captured the imagination because they are so challenging, and a contractor must be well organised to stand any chance of making a profit. Many regional companies have achieved this by entering joint ventures with international partners to introduce international best practice. Some of the leading names in construction from around the world can now be found on building sites across the region.

Things are different at the other end of the market. Less well organised contractors have struggled to meet the challenges the market has placed on them; for some, a nightmare scenario has developed. They have taken on more work than they can manage and are having serious cashflow problems. This has led to a growing number of public disputes over unpaid wages and increasing health and safety concerns, both of which tarnish the industry’s reputation. “Working with some contractors is like stepping back 20 years,” says a UK contractor new to the region.

Material prices will, as always, remain crucial and over the next six months and are expected to rise sharply in several markets. However, in the second half of the year, prices will cool as new cement capacity begins to come on line and global steel prices stabilise. The biggest increases are expected in Saudi Arabia and Abu Dhabi, as construction activity picks up. Local developer Aldar Properties claims to have 33 as yet unannounced projects on the drawing board.

Although Qatar experienced the steepest escalations in 2005, experience from the UAE indicates that prices in 2006 will rise less markedly as contractors begin to factor in heightened costs and new capacity comes on stream. In Dubai, the crisis in basic material prices may be over, but it has been replaced by shortfalls in other areas, which may develop across the region. In 2005 many contractors experienced difficulties procuring subcontracts nominated by the client. The situation is particularly acute in the mechanical, electrical and plumbing (MEP) sector, where the volume of work greatly exceeds current capacity. “We have had problems on a number of tenders where for some of the products and services we weren’t able to get a quotation from any of the nominated suppliers or contractors,” says an international contractor working in Dubai.

Labour is another area where costs are expected to rise. Wages will remain relatively flat, but the cost of accommodation is growing. Dubai’s existing labour camps are full and few new facilities are being built, leaving contractors at the mercy of landlords. “Our labour force will need to increase by about 20 per cent this year. We don’t have any spare accommodation, and renting or building new premises will be expensive and ultimately drive up the hourly cost of our labour,” says a local contractor.

Trends in Dubai are often experienced at a later date elsewhere in the region. This suggests that in 2006 many contractors and consultants will be too busy to take on more work, and specialist equipment from outside the region will continue to be limited as the latest addition to the global construction industry competes with the rest of the world for supply.

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