Red Sea crisis raises Saudi construction costs

13 March 2024
Disruption to maritime supply chains is taking a toll on construction material supply

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While the severity of the disruption caused by the Red Sea crisis to international shipping, global supply chains and logistics is evident, country and sector-specific impacts have taken longer to become apparent.

For Saudi Arabia, the burning question for several months has been whether the disruption has the potential to impact the supply of construction materials on route to the country’s west coast gigaprojects, including the Oxagon port and The Line at Neom, as well as the Red Sea Project.

Riyadh-based Jadwa Investment has now estimated that disruption to commercial shipping in the Red Sea and Gulf of Aden has contributed to a 25-50% construction material price rise in recent weeks.

This steep rise comes amid renewed escalation in the Red Sea following a start to the year characterised more by falling risk perceptions due to the heavy build-up of the US-led naval coalition in the area.

All of this changed on 18 February with the holing of the Belize-registered Rubymar, which sank on 3 March. That ship had been carrying Saudi fertiliser from Dammam to Bulgaria.

However, perhaps a more direct concern for the Saudi construction sector is the strike on 6 March of the bulk carrier True Confidence, which came from China loaded with steel and commercial vehicles.

The attack led to a fire on board, three fatalities and the abandonment of the vessel by its crew. It was also a telling indicator of the rising risk to the delivery of construction materials – much of it headed from Asia – specifically to the western coast of Saudi Arabia.

Weighing risk

Industry suppliers, shippers and logistics firms will need to make increasingly difficult choices as they work to keep the booming Saudi construction sector supplied.

Transiting the Gulf of Aden route now holds not just hypothetical but very much proven risk. War risk insurance premiums have skyrocketed – at the last count, rising to around tenfold the normal cost and equivalent to up to 1% of vessel value, depending on the build.

The alternative – overlanding material from Asia from the safe harbour of Saudi Arabia’s eastern coast – carries less risk, but higher transport overheads given the inefficiency of conveying bulky construction materials in large volumes by road – the only option at present.

The scenario makes an excellent, if belated, business case for the $7bn Saudi Landbridge, a west-to-east railroad scheme that unfortunately will only be be completed half a decade from now

As it stands, some tough decisions lie ahead. Suppliers and contractors locked into fixed pricing assumptions for construction materials will be rapidly onboarding financial risk. Projects under tender potentially face the prospect of contractors revising their bid submissions with sharply rising cost projections.

And the worst may be yet to come. While spot market prices for shipping reflect the costs incurred by the Red Sea disruption, with two to five-fold price rises for some global routes, many short-term contracts have not yet absorbed the price rises and could be set to be renegotiated in the coming months.

This raises the prospect of further price rises if the conflict and its impacts continue.

MEED’s April 2024 special report on Saudi Arabia includes:

> GVT & ECONOMY: Saudi Arabia seeks diversification amid regional tensions
> BANKING: Saudi lenders gear up for corporate growth
> UPSTREAM: Aramco spending drawdown to jolt oil projects
> DOWNSTREAM: Master Gas System spending stimulates Saudi downstream sector

> POWER: Riyadh to sustain power spending
> WATER: Growth inevitable for the Saudi water sector
> CONSTRUCTION: Saudi gigaprojects propel construction sector
> TRANSPORT: Saudi Arabia’s transport sector offers prospects

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