What will it cost us?

Every month another spike in the price of cement causes a commotion in the papers. The funny thing is that a majority of cement used in the construction in the UAE is made here. So why the sharp price hikes?

What about the significant cost of steel shooting up 70% based on global demand so they say? What people fail to understand is that the demand has gone up progressively and it will cost more as th supply becomes tighter.

This is normal supply and demand economics. What you might have missed are the stories that now the world has a lot fewer suppliers. The steel giants became steel titans in the last few years and they now control the global markets.

Companies like Rio Tinto, Corus, ArcelorMittal are but a few names that have consolidated in the past three years and they, effectively, now have an economic grip that can seriously affect global prices.

So what has this got to do with the rising cost here in the UAE and the Gulf? Everything. We, the consumers in the Gulf, are at the beck and mercy of two factors. One we cannot control and the other a folly of our own making.

The First Factor. We are a great consuming nation. We hardly produce anything yet we consume like the thing we are buying will go out of fashion tomorrow. We are wasteful and irresponsible. Allow me to qualify what I have said. We, in the Gulf, could not be a more perfect place for manufacturers of goods. The average age of the inhabitants of the Gulf is between the ages of 15 and 20.

We are exceedingly brand aware and have a great amount of discretionary and sometimes even cheap cash to spend courtesy of the banks that are handing out credit cards like lollipops with vicious costs carefully hidden from the spender.

We have no credible consumer protection organization and the laws, while beautifully put on paper, aren't enforced. Oh! And most importantly, we are very status-conscience. All these factors play nicely into the hands of the companies who, in some cases, dump their products that won't sell elsewhere here.

The Second Factor. As we import goods with prices we cannot control, we also greatly contribute to our situation by adding fuel to the fire locally.

The fact is that the abundance of liquidity and easy money that is floating due to both government rebates and government sponsored projects is greatly contributing to this dilemma. This action floods the market with cash and that is the fuel that the inflation machine needs to grow.

Then there are the private individuals who are creating these massive developments. I read that there was an increase in money supply of 37% in the Gulf and yet official figures of inflation are hovering around 8-11% depending on which country you look at.

This would be the equivalent of pouring 37% more water into a glass yet the water level increases only 8%. Add to this the companies that raise their prices for no logical reason not 10 or 15% but over 100% sometimes. A live case in point is the real estate market. Prices have shot up to the point that they are quite ridiculous.

In 1996 Warren Buffett refused to join the internet frenzy because he thought the value of what he was buying was not justified in the price that was being asked then.

As 1999 rolled by, the main news magazines were writing Buffett's obituary He was passé as they said. No longer in touch with what is happening. Then the internet bubble burst and like a flood, it washed everything in its way leaving many bodies sprawled on the banks broken and bruised.

Yet Buffett came out unscathed. In fact, today, people think that he is entitled to the title the Oracle of Omaha because he stuck to his ideas and fundamentals and did not allow his emotions to get the better of him.

I am no Oracle of Omaha, but even I can see that we need to correct our actions or else suffer the consequences.

Mishal Kanoo is the deputy chairman of the Kanoo Group. It is one of the largest family owned companies in the Gulf. The Kanoo family is the 11th richest in the Arab world with a fortune of US$6.1bn.

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READERS' COMMENTS

OPEC
Posted by David, Dubai, UAE on Monday 4 August 2008 at 18:52 UAE time


Very amusing to hear a UAE national moaning about a limited number of suppliers controlling a market and setting prices. This region's economy is based on the OPEC oligopoly!

If Mr Kanoo is serious about oligopolies being a bad thing, I am assuming he would like to see OPEC split up and each oil producing country made to compete, rather than collude - which, by the way, is illegal in most countries - for obvious reasons.

Refreshing
Posted by Luis, Dubai, UAE on Monday 4 August 2008 at 18:09 UAE time


Very refreshing to read this and more coming from a local... Especially when so much "journalism" in the region is little more than paid advertising.
When I look from my apartment in Marina most lights are off... Even if the current batch of new properties is, somehow, filled we already have the next wave coming soon.
At some point the bubble will burst and then it will be painful, the longer it takes, the more painful it will be. Real estate just imploded in my country... it was sickening to hear the "it is different"
Nothing new here, we are buying bulbs like 17th century dutchmen.

In the meantime hat off to Mr Kanoo for a well written piece of thought

Spot on
Posted by Paul, Dubai, UAE on Monday 4 August 2008 at 15:15 UAE time


I think this is the first time I have read something in the middle east media that is written by someone with a real understanding of what is going on, and the potential dangers.

The comments about money supply are absolutely right. Measuring inflation with price indexes is just a way to massage the true figure with selective measurement of certain items. The resulting lower inflation figures are used to justify continued lax economic policies.

Furthermore, since GDP growth is adjusted for inflation, it would be significantly lower if the true rate of inflation were used instead of the massaged rate of around 10%. Most of the growth in the UAE is just inflationary growth, not real growth.

I think the comments about Warren Buffet will prove to be quite insightful - much of the Dubai/UAE boom is fuelled not by measured judgements about the fair value of assets, but by a buying frenzy and fear of missing out. I suspect Warren Buffet would not be investing in Dubai right now and would be happy to sit it out and wait to be proved right again.

The right man
Posted by Paul, Dubai on Sunday 3 August 2008 at 17:12 UAE time


Can somebody please put this man in charge of the UAE economy?

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