Diesel price hikes hit contractor profits in UAE

25 April 2008
Companies estimate higher fuel prices are adding as much as 10 per cent to contract costs.

Rising diesel prices are emerging as the latest threat to contractors’ profit margins in the UAE, with firms complaining of a near doubling over the past year.

According to industry figures, higher fuel prices are adding as much as 10 per cent to the cost of carrying out a contract.

This is in addition to existing difficulties with the cost of a wide range of raw materials, and a skills shortage.

In March, diesel prices in the UAE reached an average of AED14.35 ($3.90) a gallon, up from AED8.25 for the corresponding period in 2007. The 74 per cent increase is expected to continue, with further prices rises expected in 2008 as oil prices hit new records on international markets.

According to contractors, the steady rise in prices is having a big impact on costs. Plant costs have already been affected as most on-site machinery runs on diesel.

Firms are suffering from having to pay higher transportation costs for materials such as ready-mixed concrete and transporting their labour forces by bus to and from their construction sites.

“Diesel prices affect everything,” says one Abu Dhabi-based contractor. “Transportation costs are obviously driven up, as are plant and generator costs, but it affects the cost of everything indirectly, from ready-mixed [concrete] right down to food for our labour.”

Another contractor working in Abu Dhabi says the new fuel prices could increase construction costs by up to 10 per cent on some projects. This will reduce contractors’ profit margins as most do not have escalation clauses in their contracts to cover the rising prices. As a result, they are unlikely to be able to recoup the additional costs.

Contractors warn it is likely to lead to higher prices being offered for tenders in the future, as firms factor in the impact of the higher prices on new deals, causing a knock-on problem for clients planning new developments. “If our costs go up, it is natural that we include it in our prices for upcoming projects,” says the contractor.

In August 2005, diesel prices jumped 30 per cent, which contractors say had a 5-10 per cent impact on construction costs.

Domestic fuel suppliers have traditionally provided diesel and petrol to firms at a subsidised rate, which is considerably lower than the global rate. However, as international prices continue to rise, many suppliers are operating at a loss and have been forced to increase the prices they charge.

Fuel joins a growing list of items that are rising rapidly in cost, including construction materials, equipment and services. Cement has been an issue following the closure of plants in the northern emirates for main-tenance, and steel remains a constant concern on the back of soaring global demand.

As a result, consultants working in the emirates estimate construction costs are rising by 1-1.5 per cent a month.

Diesel costs are rising in line with other refined products, as the price of crude oil continues to hit record levels on an almost daily basis. On 22 April, the price of a barrel of West Texas Intermediate, a benchmark crude price, reached $119.90 on international markets, before falling back slightly on subsequent delays.

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