Crisis point

With building costs going through the roof, is the contruction industry heading for a crisis? 
Crisis point
By Conrad Egbert
Sat 29 Mar 2008 04:00 AM

With the prices of essential building materials going through the roof, is the contruction industry heading for a crisis? Conrad Egbert takes a look.

Over the past month the price of cement and steel has shot up, causing serious inflation in the market.

April will see cement selling for more than US $109 (AED400) per tonne, while steel could fetch more than $1,000 per tonne, according to sources on the Dubai Gold and Commodities Exchange (DGCX).

It is only when an excessive rise in costs is expected that steel traders begin to keep some back.

Last month, a tonne of cement was being sold at $85 per tonne and steel at $980 per tonne.

Some contractors believe that speculation and hoarding by cement and steel producers is at the root of escalating costs.

According to Riad Kamal, chairman, Arabtec Holding, even though there is a genuine shortage of cement globally, the UAE produces 90% of its cement needs, so it has no reason to experience such inflationary pressures.

"Many of us feel that cement producers are taking advantage of the situation and are cutting supply so that the prices will go up," he said. "According to what I know, seven factories have shut production, apparently for maintenance.

They're also aware of the fact that importing cement requires special handling and storage facilities at ports that are unavailable to local contractors and will take time to develop."

Seconding Kamal's views, country head for contracting company Simplex Infrastructure, Ani Ray said he was faced with "fourteen out of 17 cement companies who said their plants were out of order".

Dubai decided a fortnight ago to scrap a 5% import duty on cement and steel, which industry players are keen to take advantage of.

"Now that cement can be imported duty-free, we're looking to import cement from foreign companies," added Kamal. "And it will have a good impact on the steel traders because it will shave that amount off their costs. But because most of the steel to Dubai is imported we have no choice but to play to the demands of international rates.

On the steel front, a trader on the Dubai Gold and Commodities Exchange (DGCX), Pankaj Gupta, regional manager of brokerage firm, SMC Comex, said that he didn't think that steel suppliers were completely out of stock.
If you know that your steel is going to be worth almost twice as much in a week, any businessman would hold on to it and sell it when the time is right.

"Prices of steel are expected to go up even further in April. At the moment, if you buy about 5,000 to 6,000 tonnes, you'd be able to get it for a price of around $1,000 per tonne after taking additional costs into account; if you buy less it's going to be higher," he added.

In March, rebar was selling for nothing less than $980 in a steel futures contract expiring in the first week of April on the DGCX. There were no sellers for the May contract at that price, insinuating a further increase in price.

But producers have dismissed any ideas of hoarding and speculating. Chris Lobel, general manager for cement supplying company, Ready Mix Concrete said that the rise in cost of cement was due to a rise in the cost of clinker.

"A tonne of clinker is being sold above the current cement cap so obviously no producer wants to run at a loss. If you take into account the added costs of grinding and manufacturing, the cost will obviously go up.

Steel traders on the other hand are blaming the price hikes on the Turkish market, saying most of the steel used in the UAE comes from Turkey so a rise in cost there would directly affect steel costs in the UAE.

DK Mehta of Emirates Rebar Company said: "The main reasons for the rise in costs is due to the price of scrap going up and the cost of alloys which are used in manufacturing it. And more importantly, the Turkish mills are taking advantage of the situation.

Also, China has imposed duty on the export of rebar and raised the duty on billets, making it unfeasible to import from there, and the Turkish mills are very aware of this.

Also, no one likes holding back steel. It's only when an excessive rise in costs is expected that steel traders begin to keep some back, but that is natural business.

Mehta added that if something wasn't done about this soon, the situation could spell disaster for many contractors.

According to consultancy firm, EC Harris, construction costs in the UAE could jump by a fifth in 2009 due to higher material and labour costs.

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