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Tue 22 Jul 2008 07:01 AM

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Firms seek protection from steel price hike

Construction firms strike deals on developments to pass on escalating costs.

Construction firms in the UAE are attempting to protect themselves from soaring steel prices by agreeing clauses in development contracts, passing on escalating costs to land owners.

But the companies at the forefront of the country’s massive construction boom said although projects they were involved in would be unaffected by the price rise, they’re overall profit margins were still taking a hit.

It follows the announcement that steel prices jumped by almost 10 percent in one week as demand for construction materials continues to drain the local market.

Riad Kamal, CEO of Arabtec Holding PJSC, said the price hike was leading to rising costs on construction projects which had been underway for the past six months where steel was still being sourced.

He said the firm’s 550 villa development at Warsan Estate, Dubai, would be unaffected as it was a “cost plus job”, meaning the client had agreed to cover all construction costs.

Mr Kamal said: “The cost has gone up and unless we are compensated then we will suffer like everyone else.

“Reinforcing steel is a global commodity and we are trying with our clients to see if they will be understanding and compensate us for losses we’ve had.

“We are still making money as we are working efficiently and have a big turnover and are covering ourselves but smaller firms working on projects with fixed rate contracts may not be so fortunate.”

Bishoy Azmy, CEO of ASGC, said: “We are all facing shaved profit margins because of the increasing cost of major commodities, primarily steel and secondly cement and diesel, but most contractors are becoming wiser and are inserting escalation clauses which transfer the risk of rising steel prices to the owner.”

British builder Laing O’Rourke, whose UAE projects include the $20 billion Al Raha Beach development in Abu Dhabi, said it was overcoming the rising costs by buying steel in bulk for a fixed price.

Norman Haste, chief operating officer for Laing O’Rourke in the Middle East and South Asia, said the rising price of steel was pushing up aggregate costs by one and a half to two per cent each month.

He said: “It means we are constantly trying to find the best deals between Turkey and China and elsewhere where you can get steel from.

“The only way you can operate in this market is to make sure you are dealing with big quantities where there is a fixed price but the difficulty then is to find somewhere to put the steel before it’s used in projects.

“It’s very difficult to hedge as the sort of quantities we are talking about are large sums of money and hedge funds are not in that sort of league so we are just having to ride it out.”

Philippe Dessoy, general manager of Belgian construction firm Besix, said buyers of real estate would ultimately end up by being hit by the rising prices by having to pay more for property.

He said: “The steel is available on the market but it’s just the cost of it that is the issue. We are trying to ask the client to take the risk so if the price of steel goes up or down that would be included.”

A tonne of reinforcing steel bar, used in construction, fetched around $1,700 on Sunday, up from around $1,550 on July 13, dealers said.

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