Region's construction prices remain soft

18 November 2010

The slowing of construction activity in the region, coupled with adequate supply, has meant prices of materials and labour remained weak in the third quarter of 2010

Key fact

During the first six months of 2010, the price of steel in Saudi Arabia soared by 55 per cent

Source: Davis Langdon

A slow-moving construction market and adequate supply has resulted in the cost of raw materials in the region remaining weak during the third quarter of 2010. The latest survey of construction costs in the Middle East conducted by the Dubai office of UK consultant Davis Langdon shows minor decreases in the prices of some materials, compared with the second quarter. This contrasts with the first few months of the year, when the region witnessed a significant spike in steel prices.

In addition to a lack of activity in the region’s construction sector, industry analysts point to the time of year as another factor behind the softness in the prices of key materials.

“In the first half of the year we saw quite a bit of pressure, but that has stabilised somewhat” says Farouk Miah, equity research analyst at Riyadh-based investment house NCB Capital. “The [construction] market slows down because of the summer and Ramadan, so you get demand [for materials] falling.”

Steel price spike

During the first six months of 2010, the price of steel in the GCC soared dramatically. Saudi Arabia was hit hardest, with the price of steel reinforcing bars (rebar) increasing by 55 per cent.

The main reason behind the surge in steel costs in the kingdom was the decision by state-owned manufacturer Saudi Iron & Steel Company (Hadeed) to raise its prices by more than 30 per cent in April. Hadeed is the main supplier of rebar to the Saudi construction industry and it had, on the instruction of the Commerce and Industry Ministry, kept its prices low during the financial crisis of 2008-09.

“The market [for steel] is pretty stable, but prices are a lot lower than they were two or three years ago”

Doha-based contractor

But during the third quarter, steel prices in most markets lost some ground, while the price of rebar in the kingdom has remained unchanged at $770-960 a tonne since June. In the UAE and Bahrain, the cost of rebar has fallen by about 2 per cent since June. Qatar has seen stronger declines of 9 per cent from $792-895 a tonne in June to $718-810 a tonne in October. Despite these decreases, rebar prices are still significantly higher than before the hikes came into force in April.

There was only minimal movement in the price of structural steel during the third quarter. It remained flat in Saudi Arabia and the UAE, standing at $1,300-1,700 a tonne and $955-1,225 a tonne respectively.

The only country in the GCC to have experienced a significant movement in structural steel prices in the third quarter was Qatar, where prices fell from $1,645-2,190 a tonne in June to $1,370-1,825 a tonne in October.

“There has been a slight reduction in steel prices this year, but not by much; the market is pretty stable. Prices are a lot lower than they were two or three years ago,” says a contractor based in Doha.

Cement prices mostly remained stable between June and October. The price of a 50-kilogramme bag of cement increased by $0.15 in Saudi Arabia and held firm in most of the region’s other markets.

Ready-mix concrete prices came under pressure during the quarter. The price in Saudi Arabia remained flat at $56-70 a cubic metre, while in the UAE levels dropped by about 3 per cent from $71-85 a cubic metre in June to $69-82 a cubic metre in October. Qatar saw a similar decline. The country out of those surveyed that recorded the largest drop was Bahrain where the price of ready-mix fell by about 10 per cent to $90-100 a cubic metre, from $102-109 a cubic metre in the first half of the year.

Saudi Arabia is the region’s second-largest projects market behind the UAE and the kingdom awarded more than $106bn-worth of construction contracts in the first six months of 2010. But the raft of projects has had little impact on the cost of cement in the kingdom. Analysts say that, despite an increase in demand for cement, the market is still oversupplied.

Cement oversupply

“The reason for the stabilisation of cement prices is that supply is still way in excess of demand [in Saudi Arabia],” says Miah. “There is 10 million tonnes of clinker inventory and on top of that the supply of cement will remain about 5-8 million tonnes ahead of where demand is going to be.”

In August, the Saudi government approved the country’s ninth five-year development plan, which commits to spending $385bn on infrastructure projects. But, despite the investment programme involving major construction work, those on the ground feel it will not have a significant impact on the cost of materials in the short term.

“These things look good on paper, but on the ground there is not much going on,” says a Saudi-based consultant. “For example, the four or five big economic cities are on 15-20-year programmes and so will not act as an immediate catalyst for the cement market. In the long term they will support the cement sector, but they will not have an immediate impact.”

Furthermore, the healthy margins in the kingdom’s cement industry mean that any increase in demand is likely to be met with an increase in supply.
“Globally, the cement industry makes a 25 per cent margin,” says Miah. “In Saudi Arabia, even today, they are making 40 per cent margins. That is why we expect another 2-4 cement plants to open in the coming years.”

Labour costs

The lack of new contract awards and project starts in the region’s construction market has meant that labour costs have mostly remained stable since the beginning of the year. Competition for staff has reduced dramatically as firms struggle to keep employees in work. The days when construction workers were in short supply and could name their price are now a distant memory.

The average monthly salaries for local labourers in most countries surveyed has remained static since early 2009, along with those for expatriate project managers and for site engineers.

“Particular countries may become hot, but overall I don’t expect to see any major price rises any time soon”

UAE-based consultant

The exception is Bahrain, which has seen steady erosion in wage levels since last year and experienced further weakening in salaries for local and expatriate workers between June and October. The average monthly salary of an expatriate project manager working in Bahrain is almost 10 per cent lower in October than in June at $9,500 a month, while that of an expatriate site engineer is down by about the same margin to $5,750 a month.

The average monthly salary of local site engineers has fallen by some 15 per cent since June to $4,250 a month, while that of a local project manager has dropped to $7,300 a month from $8,000 a month in June.

“There appears to be a never-ending supply of labour. I don’t think labourers will ever have the value that they did during the boom,” says one contractor in Dubai.

With less than eight weeks left in the year and the Eid holidays falling in mid-November, construction material prices are unlikely to see any significant changes in the remainder of 2010. Industry sources also expect levels to remain flat into 2011.

“I can’t see much heating-up of any markets that would result in a costs rise,” says a UAE-based consultant. “I think we will see a stabilised general market for a while to come. Particular countries may become hot, but overall I don’t expect to see any major price rises any time soon.”

This could change if Saudi Arabia continues to unveil new large-scale developments, or if Qatar is successful with its bid to host the 2022 World Cup. But, with prices still as much as 30 per cent lower than they were before the downturn, the region remains a buyers’ market.

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