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By SHARAKAT

The six months to March have seen mixed results in terms of construction material prices in the Middle East, with cement rising in some markets and steel falling in others, according to the latest report on regional materials and labour costs conducted by the Dubai office of the UK’s Davis Langdon.

The mixed picture is due to several factors, from cement supply problems in the Saudi market to slow progress on projects in Qatar. Lebanon was the only country to record a significant rise in labour costs following the government’s decision to raise the minimum wage.

Some of the largest increases have been witnessed in Saudi Arabia’s cement sector, driven by rising demand and some short-term supply issues. According to Davis Langdon, the price of a 50kg bag of cement in the kingdom climbed 16 per cent between October and March to $4.27.

Saudi housing schemes

After three years of stagnating prices, a renewed drive from Riyadh to push ahead with vast housing schemes has contributed to the revenues of the nine listed Saudi cement companies rising by 21 per cent in 2011, according to local investment firm NCB Capital.

“The demand for cement has been strong in the last couple of quarters,” says Farouk Miah, head of equity research at NCB Capital. “The first and fourth quarters are usually stronger due to seasonal demand and the weather is better, so there is more project activity.”

NCB Capital expects increased government and private spending on construction projects to result in demand for cement rising 10 per cent in 2012 and 8 per cent in 2013.

Another major factor behind the recent price increases is a lack of confirmation from state oil company Saudi Aramco to provide fuel for new cement plants. The local Yanbu Cement and Southern Province Cement have struggled to reach agreements with Aramco for fuel allocations for new cement lines, while Qassim Cement’s request to open a new cement line was refused by the oil major.

Increased spending on construction in Saudi Arabia will cause demand for cement to rise by 10 per cent in 2012

NCB Capital

“The shortage of fuel for the new plants is the main reason for prices rising,” says Miah. “The demand is strong, but there has been a shortage of supply due to the problems in obtaining fuel allocations for new plants. All of the fuel is subsidised for cement producers and if the fuel allocations are interrupted, it affects production.”

According to NCB Capital’s latest update on Saudi Arabia’s cement sector, the kingdom consumed 47 million tonnes of cement in 2011, while total production capacity was 53 million tonnes. However, growing demand and the shortage of fuel are creating pressure on supplies. Cement demand in 2012 is forecast to be 52.2 million tonnes.

Despite the threat of short-term supply problems, analysts say that government control of the kingdom’s materials market will prevent costs inflating to the levels seen during Dubai’s construction boom. “The government price ceiling will ensure that prices don’t spiral out of control,” says Miah.

Riyadh also recently extended the cement export ban, which has been in place since 2008. The ban was initially conditional, which meant that cement firms could export cement if it was sold at a maximum of SR200 ($53.3) a tonne, a quarter lower than the current market price. However, on 14 February, the Trade Ministry introduced a blanket export ban on cement and clinker.

Although the impact of the ban on the majority of cement producers is expected to be limited, with total exports making up only about 4 per cent of total sales, according to NCB Capital, it should help prevent prices soaring to the levels seen in the UAE in 2008.

Lebanon’s decision to increase the minimum wage saw labour costs rising for all categories of manual workers

In addition to widening the export ban on cement, on 5 March, the Saudi government announced that it would allow imports to avoid the potential of a supply shortage. However, NCB Capital says the ability of cement imports to hold down prices will be limited as the shipments would entail additional transportation and insurance costs.

UAE hike in materials prices

Elsewhere, the UAE recorded an increase in cement prices, with the cost of a 50kg bag of cement rising by about 10 per cent from $3.5 to $3.9 between October and March. This is the first time cement prices have climbed in the country since July 2008. The price of aggregate grew by 16 per cent from $10.5 to $12.5 a tonne over the same period, while ready-mix concrete increased marginally to $63 a cubic metre.

The rise in prices may be partly attributable to a pick-up in the UAE construction market, with the total value ofconstruction and infrastructure awards in the first quarter of 2012 climbing 18 per cent to $1.6bn, from $1.3bn in the first three months of 2011.

However, the gains in Dubai have been overshadowed by a slowdown in Abu Dhabi, which has seen construction contract awards plummet by more than 87 per cent year-on-year in the first quarter of 2012.

According to contractors, the price increase in the UAE’s cement sector is likely a result of improved sentiment due to the pick-up in Dubai, coupled with the approval of more than 20 infrastructure schemes in January by the Abu Dhabi Executive Council, which has led to suppliers seizing an opportunity to lift prices.

The largest price increase in the ready-mix concrete sector was recorded in Lebanon, where levels climbed from $81.5 a cubic metre to $85 a cubic metre.

The price of a 50kg bag of cement in the country remained flat at $5.20, the most expensive rate in the region. The prospects for Beirut’s cement sector in 2012 are bleak, however, with internal and external demand falling. The collapse of its government and the uncertainty caused by the uprising in Syria contributed to a 6.8 per cent year-on-year drop in the number of construction permits in 2011, according to data from the Order of Engineers of Beirut and Tripoli. Domestic demand is unlikely to rise in 2012 due to the continued weak economy. Lebanon’s gross domestic product growth slumped from 7.1 per cent in 2010 to 1.7 per cent in 2011, according to the UK’s HSBC.

Lebanon’s cement export market is also facing difficulties as the violence in Syria worsens. As well as hitting consumption in Syria, the unrest has made it difficult to transport goods through Syria to Iraq, which, along with Egypt, formerly accounted for 97 per cent of Beirut’s cement exports.

Qatar construction delays

Despite the excitement surrounding Qatar’s successful bid to host football’s 2022 World Cup, its construction boom has yet to get under way, with the majority of major projects still at the planning stage.

As a result, the price of most raw materials remained flat between October and March. The exceptions were structural steel, which fell by 9 per cent from $1,351 a tonne to $1,234 a tonne, and ready-mix concrete, which fell slightly from $94 a cubic metre to $92 a cubic metre. However, with more than $70bn-worth of construction and infrastructure projects planned over the next 10 years, consultants expect to see prices in Doha start to rise in 2013.

“Qatar is an interesting market, it is in the procurement stage of selecting consultants,” says Nick Smith, head of cost and commercial for EC Harris Middle East. “It needs to get all of this sorted before the projects [move ahead]. When the projects start, they may need to change the supply chain and import materials if the capacity [isn’t available].”

Qatar was not the only market surveyed to experience a drop in steel prices. In the UAE, the price of reinforcement steel bars (rebar) fell from $807.50 a tonne to $765 a tonne. In addition to a slowdown in the Abu Dhabi market, the decrease has been attributed to cheaper steel imports from Turkish firms. “There is not much work in Turkey just now, so [local producers] may opt to ship steel to improve cash flow and [generate] income,” says Smith.

In Lebanon, a softening construction market also resulted in the price of rebar falling from $770 a tonne to $758 a tonne and the price of structural steel dropping from $1,625 a tonne to $1,575 a tonne. Saudi Arabia bucked the trend with strong demand pushing up the price of structural steel from $1,500 a tonne to $1,600 a tonne, while the cost of rebar remained flat.

Beirut labour costs

Despite a slowdown in Beirut’s construction sector, the government’s decision in January to increase the minimum wage resulted in labour costs rising for all categories of manual workers in the first quarter of 2012. The daily rates for foremen, carpenters and labourers rose 8 per cent, 16 per cent and 22 per cent respectively.

Bahrain was the only other country to record higher labour costs, despite the value of its projects market plummeting during 2011 as a result of the political unrest. Although consultants are unclear about the reason for this, the increase is likely to be related to the government’s decision to raise wages for public sector employees in August 2011.

Qatar was the only country to see a drop in labour costs, with the average monthly salaries of local and expatriate site engineers falling marginally. Despite this, wages for labourers in Saudi Arabia and Doha are expected to increase over the next few months as both countries push ahead with vast construction programmes.

Lebanon was the sole state to see increasing diesel prices, with levels rising to just over $1 from $0.88 a litre early in 2011. Unlike other surveyed markets, Beirut is an oil importer and is therefore at the mercy of fluctuating global prices. The UAE remains the second most expensive diesel market at $0.80 a litre.

Stable material prices

The scaling back of projects in Abu Dhabi and the slow progress of construction schemes in Qatar are expected to result in material prices remaining relatively stable for the next 12 months before rising next year. “We expect commodity prices to remain flat in 2012, and pick up in 2013 as new projects are put out to tender and awarded,” says Smith.

In addition to local and regional demand, the cost of raw materials is also dependent on global factors such as the eurozone crisis, uncertainty over Iran and fluctuating oil prices. A major change in any of these factors could have a short-term impact on material prices.