Saudi contractors push for steel price index

30 May 2008
Construction companies urge Riyadh to create benchmark to bring greater stability to the market.

Saudi Arabia’s construction companies have called on the government to establish a steel price index in the kingdom in a bid to bring greater stability to the market.

The index could track the market price of steel, providing an industry-wide benchmark. Consultants and contractors argue that such a move would bring greater transparency to the sector and lead to more realistic bids.

In the current market, contractors, wary of the rapidly increasing price of steel and other materials, are incorporating high margins into their bids to cover themselves from potential future price rises.

“This greater transparency and information would not only ensure wider knowledge, but [would also] reduce spiralling construction costs,” says Zuhair Fayez, senior vice-president of local consultant Zuhair Fayez Partnerships.

“This is what the sector wants. If you have price indices, then you can adjust the price accordingly, up or down. This will stop contractors putting cushions in their prices, pre-empting cost rises. But it is up to officials to work out how to put price indices into the system.”

The issue has recently been raised with the Council of Ministers in Riyadh, but no action has yet been taken. “These things can be done, you just need the guts to do it,” says one Riyadh-based contractor.

Such an approach would have a calming effect on the sector as the information available to everyone would mean estimates could be made more accurately, says Osama Adel, deputy manager of the bidding department at the local Al-Redwan Contracting Company. “If you have a price index, it would stabilise prices as everyone would know the day-to-day cost.”

The call comes as contractors are facing steel prices of SR6,000 ($1,600) a tonne. “The price increased by another SR600 two weeks ago,” says Adel. “We expect the price per tonne to hit SR7,000 in the near future.”

With such high costs, contractors are struggling to deliver projects at a profit.

One contractor, Saudi Lebanese Modern Construction Company, recently walked away from a SR240m residential contract as the developer would not agree on an escalation margin in the contract.

Elsewhere in the Gulf, the rising cost of steel has been a key factor behind a trend for contractors and clients to form partnerships. Such tie-ups are being used as a way of sharing the risk, as well as ensuring access to resources for future projects.

At the end of 2006, the UK’s Laing O’Rourke formed a joint venture company with Abu Dhabi-based developer Aldar Properties to develop Al-Raha Beach. In 2007, Aldar established a similar operation with Belgium’s Six Construct to build some of the $40bn Yas island development, the venue for the Abu Dhabi Grand Prix in 2009 (MEED 1:2:08).

In 2007, Dubai introduced a steel futures market to help contractors predict short-term price trends.

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