Sub-prime crisis hits Gulf contractors

03 December 2007
Contractors working in the Gulf are beginning to experience a downturn in activity as projects are delayed or postponed as a result of the ongoing sub-prime crisis in the US.

“The sub-prime crisis is having an interesting affect,” says one Doha-based developer. “Financing is still available, but it has become more expensive, and projects that had a marginal business case have been reduced in size, postponed or cancelled. That has led to spare capacity in the contracting market. In June and July, it was difficult to get contractors interested in projects - they were simply too busy. Over the past few weeks, they have been calling, looking for work.”

Big contracting organisations working on major projects for government and quasi-government developers are expected to escape the downturn. Firms working on smaller, less profitable projects exposed to financing issues will be hit the hardest.

The slowdown is also affecting other parts of the supply chain. “Material prices also seem to have been affected,” says the developer. “Steel and cement prices have levelled off, and that is something we were not expecting.”

The shift in the balance of power between clients and contractors is the latest sign that this relationship is becoming more dynamic as the market matures. Until 2005, clients were in control. Contractors were desperate for work and many companies submitted overly competitive prices for projects. This meant they ended up losing money.

Three years ago, the situation changed, becoming a sellers' market as contractors with full order books began to turn down enquiries, and many withdrew from tendering altogether.

The first signs that the market is moving back in favour of clients appeared in the summer, as contracting capacity in Dubai began to catch up with the market, and several of the larger organisations began to tender again. “If we do not pick something up in the next few weeks, we will have to use our muscle and put in an aggressive price,” said one estimator at the time.

Those fears were shortlived. The region experienced its busiest summer to date, with several major contract awards. By late August most major contractors were able to withdraw from the market so they could concentrate on the work they had secured.

But the rapid expansion in capacity that most contractors have experienced in the past two years means they cannot afford to be complacent.

The industry needs a large number of projects to sustain itself.

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