Prices peak in the Gulf states

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Regional materials prices have soared but the signs are that the boom has peaked

By August 28 cement, rebar and diesel prices were all at record highs in the Gulf, according to research gathered for Construction News' sister magazine MEED by cost consultant Davis Langdon, reports Bernadette Redfern.

In the six months from February 28, rises for cement in the Gulf varied between 12.5 per cent in Saudi Arabia to 23.5 per cent in the UAE.

Inflation for steel rebar was even higher, with a 49.5 per cent rise taking prices as high as £1 a tonne in Bahrain in July.

Rises were almost as high in the UAE, with a 43.5 per cent rise bringing prices to £82 per tonne and surprisingly the region's biggest steel processing giant Saudi Arabia hit a peak of £861 in August, a massive rise of 54 per cent. Qatar, thanks to production from Qatar Steel Company easily meeting local demand, was the least affected.

Cement prices have also risen recently by as much as 23.5 per cent in the UAE to £3.7 per 5kg bag. Prices across other Gulf states all rose to a similar peak.

Soaring domestic demand is certainly one of the drivers behind the rises. Saudi Arabia has now banned its producers from exporting steel or cement. The kingdom has also acted to help contractors that have been adversely affected by soaring raw material costs.

A royal decree was issued in late June stating that contractors would be compensated for rises in the price of steel, copper, wood and cement. The decree also allowed for a doubling in the size of advance payments on government contracts from one per cent to two per cent.

In Qatar the government has similarly acted to reduce inflationary pressures. "The government has intervened and fixed the price of cement and fuel," says general manager at Belgium's Six Construct, Philippe Dessoy.

"The government is effectively paying the difference. Anything over 3QR a tonne ($1) for steel government is paying. When you consider it costs $14 to $15 a tonne in the UAE that is a big help."

But it looks as though there could be some relief on the horizon for the whole GCC construction sector. Globally, steel prices have collapsed.

"Internationally steel has lost 25 per cent of its value," says executive director, steel & base metals at the Dubai Gold and Commodities Exchange John Short.

"But these prices are yet to be really absorbed into the local market. Guys who bought steel at peak prices in July won't necessarily receive it until October."

But there are signs that the global price drops are beginning to have an impact on the Middle East. "Steel futures on the DGCX were trading at $7 (per tonne) at Christmas. By July it was $153. It peaked at $154 and over the past four weeks has fallen to just below $14," says Mr Short.

Prices for steel are therefore falling and regional cement prices are expected to be next. A series of key studies into the sector, one carried out by MEED Insight in October 27 and another by National Bank of Kuwait in March 28, are forecasting overcapacity in the market by 29/21.

In the past 12 months alone an enormous 21.4mt a year of cement capacity has come online in the Gulf with the majority of the new capacity in Saudi Arabia and the UAE. This brings current total regional capacity to 74.5mt per annum and with demand at around 65.1mt an overcapacity already exists.

Overall the market is adjusting to the continuing high demand for construction materials by increasing local supply and as Gulf capacity increases and imports fall, prices are likely to moderate, bringing construction inflation down to more manageable levels.

The global adjustment of oil prices will also ease the pressure, particularly for the UAE where price rises are felt most acutely. So it seems that in terms of materials price inflation the worst is finally behind the Gulf construction sector.