Cement and steel prices set for further increase

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Price escalation clauses could be good for both contractors and developers.

Cement and steel price increases in the UAE are expected to reach the 20% mark this month, according to some industry experts.

Cement and steel make up 30% of construction costs, which means a loss of millions of dollars for all projects. Rising costs could also force investors to look to other Middle Eastern countries for business opportunities. By the end of this month, steel prices are expected to reach US $816 (AED3000) per tonne and cement could touch $95 per m³.

Last month, ArcelorMittal, the biggest steel producer in the world, said that it would raise the price of its long steel products in the Middle East region by $30 per tonne from January 1, 2008. It said the price rise would be applied in the region around the Black Sea and the Mediterranean Sea, the Middle East and Turkey.

The company already said in November 2007 that it was raising its prices in the US, Canada, Mexico and in Europe, because of a rise in the cost of raw materials and because of unusually strong demand. Speaking to Construction Week, Ani Ray, country director, Simplex Infrastructure, said that the situation would particularly affect Dubai.

"At least in Abu Dhabi, the contracts carry a price variation clause which makes it better for the contractors, but in Dubai most of the contracts are lump sum," he said.

"We could expect to see many of the smaller companies folding up this year due to these escalating costs. Cement could go up to $95 per m³ by the end of this month while steel could touch $816. This is going to directly affect construction here. Sub-contractors and contractors are going to burn their fingers due to their contract types and so many projects will be delayed. Something needs to be done about it because as of now, it's the developers alone who will see an increase in profits.

Chris Lobel, general manager, ready mix concrete, Conmix, feels that the situation could also force investors to look at other less expensive markets like Kuwait and Saudi Arabia.

"If the price of cement goes up, we go up immediately as well. It's going to affect the contractors. They need to ask for an escalation clause. This is due to the high demand all over the world at the moment," he said.

"Adding an escalation clause is the best thing for all parties including the developer and I don't understand why no-one sees that. Contractors are adding huge margins into the contracts.

"Sometimes, they add a 30% escalation estimate when it is actually a 10% one. The developer can avoid this by just paying the real difference instead of agreeing to an overestimated lump sum.

"Another danger is that investment will slow down. If cement factories jack up their prices here then obviously people will start looking towards other places like Kuwait and Saudi Arabia. The main people investing here are the Saudis, Kuwaitis and Iranians. If this goes on they'd just start looking at alternative markets.

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