Projects 2010: Market begins to recover in the region

21 December 2009

Contract awards are expected to pick up significantly in the year ahead, with more than $500bn worth of projects currently being tendered across the region as clients take advantage of lower construction costs

With a modest economic recovery expected in the Middle East and North Africa region over the next year, confidence is returning to the projects market. Clients, contractors and subcontractors alike are expecting 2010 to be a busy year for project awards, particularly in the energy sector.

Their view is supported by the International Monetary Fund, which is predicting that -economies in the region will grow collectively by 4 per cent in 2010, up from 2.2 per cent this year.

There are plenty of projects to be awarded. MEED research shows $505.8bn worth of projects across the region are at the prequalification, bidding or engineering, procurement and construction (EPC) stages.

A further $623.9bn worth of projects are currently on hold, but any upturn in the economies of the region could prompt clients to restart at least some of these schemes.

If they do go ahead soon, they could still take advantage of lower construction and manpower costs, which have dropped by up to a third since their most recent peaks. The costs of cement and aluminium, for example, have dropped by about 30 per cent since the commodities market peaked in July 2008. Prices for other commodities have dropped even more. Rebar (reinforcement steel bars) is currently trading at about $510 a tonne, compared with $1,550 in July 2008.

Projects going ahead
CountryValue ($bn)
UAE 213.9
Saudi Arabia 94.6
Iran 35.0
Kuwait 25.2
Jordan 22.7
Oman 21.6
Iraq 19.1
Tunisia 8.8
Bahrain 8.7
Morocco 7.6
Egypt 6.1
Libya 5.2
Yemen 2.1
Note: Table includes all projects at prequalification, bid, or engineering, procurement and construction stage
Source: MEED Projects 

Falling costs

According to French contractor Technip, Middle East construction costs, expressed in man hours, dropped from a high of $85 an hour in July last year to $40 an hour in August 2009.

“There is a window of opportunity here,” says Arturo Grimaldi, Technip’s senior vice-president for the Middle East. “Advancing a project award by six to eight months means the purchasing or subcontracting on an EPC project in early 2010 will benefit from a market that is still at a very convenient level of prices.”

However, prices are unlikely to remain low if the economies grow and demand for commodities and labour returns. “There will never be a cheaper time to build than now,” says one Qatar-based contractor. “By doing the megaprojects well in advance, they can plan accordingly, and we can put in proper bids.” 

The prospects for the GCC energy sector in particular are promising, according to a forecast by MEED Insight, the research division of MEED. Based on planned energy developments across the six Gulf states, the forecast shows that just under $100bn worth of energy project awards will be made next year.

At least $48bn worth are expected by 2011, although that figure could rise as more projects are announced. The current forecast for 2012 suggests $9bn worth of awards will be made that year, with a further $19bn worth of possible awards, although these figures are also likely to rise.

What will be equally welcome for clients in the year ahead is their strong position in talks with contractors. With so few projects going ahead in 2009, compared with the boom years of 2003-08, contractors had to fight hard to win any work, shifting the balance of power in negotiations to clients.

Projects on hold
Country Value ($bn)
UAE 444.0
Kuwait 40.8
Saudi Arabia 40.1
Algeria 24.5
Iraq 20.3
Bahrain 9.1
Qatar 7.9
Oman 6.5
Iran 4.8
Lebanon 1.8
Morocco 1.6
Jordan 1.1
Yemen 1.0
Source: MEED Projects 

Client advantage

Clients have taken advantage of that by retendering projects in the hope of attracting lower bids. They have also typically drawn up long-lists of prequalified companies to make sure they get the best possible price.

Such trends are likely to remain in place in 2010, and the projects market will continue to function in favour of the client. The Middle East is the only region in the world with a slate of major energy projects planned, meaning competition between contractors is tight and they will be forced to accept lower margins to win work.

Grimaldi predicts an “improved outlook” for onshore and offshore capital expenditure in the energy sector in 2010. Crude oil prices more than doubled in 2009, rising from February’s low of $32 a barrel to trade at close to $80 a barrel towards the end of the year. These higher prices will act as an incentive to oil and gas companies to invest in further prod-uction capacity.

Grimaldi predicts that by June 2010, $21bn worth of oil and gas contracts will be awarded in the UAE alone, which is expanding its oil and gas production both onshore and offshore. He predicts $40bn worth of contracts will be awarded in Qatar, Saudi Arabia and Kuwait by 2012.

Overall, the UAE, Saudi Arabia, Iran and Kuwait are the four markets with the biggest potential for project awards in 2010, according to regional projects tracker MEED Projects. Beyond the energy sector, Saudi Arabia’s public infrastructure spending programme will continue into 2010. The kingdom currently has $40.8bn worth of projects on hold. The largest of these are private schemes such as the $4bn Al-Rajhi petrochemicals complex at Jubail. But government spending over the past year has to a large extent compensated for the lack of private sector activity.

Projects such as the $6.6bn King Abdullah Financial District and a series of major rail projects such as the Saudi Landbridge and the high-speed line linking Mecca and Medina are providing private contractors with a steady stream of work.

Better credit

While public projects will continue to dominate in the kingdom next year, John Sfakianakis, chief economist at Banque Saudi Fransi, predicts private sector project activity will make a modest recovery in 2010, thanks to improved access to credit – loans to the private sector recorded their fourth month-on-month gain in September.

“Banks will become less exuberant, pursuing lending based on recognisable cash flow business and fundamentals,” he said in a report on the Saudi economy published in October. “The outlook for 2010 is one of circumspection for at least the first few months. But will this be enough for us to see a full rebound? At the moment, we prefer to be cautious for at least the first quarter of 2010.”

Qatar’s project market also offers opportunities for contractors. According to data from MEED Projects, the value of projects planned or under way is expected to rise in the coming year to $14.96bn in the third quarter of 2010, exceeding the $12.2bn recorded at the beginning of 2008.

The spike in the expected value of projects reflects approval being given for a handful of large, government-backed schemes, the biggest of which are Mesaieed Port and Al-Shaheen refinery.

The government of Qatar is planning to build a deep-sea port at Mesaieed, south of Doha, covering 20 square kilometres and costing about $6bn.

The engineering, procurement and construction award for the port is expected in the second quarter of 2010.

“[Contractors in Libya] are not having to outbid each other or suffer from failures and a lack of deliverables”

Christyan Malek, equities analyst, Deutsche Bank

The port will be built in three phases, the first of which is scheduled for completion at the end of 2014. Six years later, phase two will be completed, and by 2025, the port will be fully operational, capable of handling 6 million 20-foot equivalent units (TEUs). 

The $11bn EPC contract for the Shaheen refinery is also due to be awarded in the final quarter of 2010. State energy firm Qatar Petroleum plans to build the refinery in the Mesaieed industrial area, close to the planned port. Once completed, it will be able to process up to 250,000 barrels a day of heavy marine crude feedstock.

More than 20 companies have been invited to express interest in the EPC contract, including Hyundai Engineering & Construction, -Daelim Industrial Company and SK Engineering & Construction, all South Korean, Bechtel and Foster Wheeler of the US, and Technip.

While the markets of the Gulf are expected to enjoy a modest recovery in 2010, less developed markets elsewhere in the region also offer potentially lucrative opportunities to contractors, albeit with higher risks.

In Libya, the government has put in place major development plans for 2010, which will involve spending almost doubling from 2009 levels. While the 2009 budget allocated $8.3bn for projects, with $2.8bn for housing and infrastructure, the projects budget has been set at $19.3bn for 2010. The largest proportion will still be for housing and infrastructure projects, at $7.4bn, and the second-largest will be for projects planned by the state-owned Organ-isation for the Development of Administrative Centres (Odac).

Odac is a key client for many contractors with a presence in the republic. Among its major projects, it is managing the $3.2bn expansion of Tripoli’s Al-Fateh university, which will create two new campuses and involves the construction of 73 buildings. Contracts worth $1.28bn have already been awarded to firms including Turkey’s Guris, Feka, Nurol and Yuksil, and the local Libyan Investment & Development Company. There is an opportunity for construction companies to win much more work on the project in 2010, as the project manager, the US’ Hill International, awards more contracts.

Oil funding

Libya’s spending plans are backed by its oil revenues, which have been boosted by the higher price for crude in the second half of 2009. This is likely to lead to other oil producing states in the region continuing their public projects spending programmes into 2010. Construction industry -observers are cautiously confident for the year ahead.

“There’s a lot of excess capacity, and [contractors] are not having to outbid each other or suffer from failures and lack of deliverables as in the past,” says Christyan Malek, equities analyst at Deutsche Bank.

The main reason the industry remains -cautious is that, having learned the lessons of the boom years of 2003-08, when many projects were planned without a proper analysis of -supply and demand, most people feel the post-crisis projects market, in the Gulf in particular, will be leaner.

Government spending may be relatively buoyant, but bank lending to the private sector is only slowly recovering, meaning a full recovery will take years.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications