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Thu 21 Feb 2008 06:13 PM

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Region at risk as supply chains tighten

Global contraction of raw materials and workers' rights threatens to derail construction boom.

The Gulf region’s booming construction industry is at grave risk of contracting as global supply chains for building materials tighten and the debate over wages for expat workers rages on, warned the UAE Minster of Economy.

Driven by skyrocketing demand from competing emerging nations, in particular, China, the cost of raw materials has bloated in recent years and threatens to derail regional developments, especially those that have not been able to lock in future contracts at agreeable prices.

Sheikha Lubna Al-Qassemi raised the issue at the Abu Dhabi Economic Forum last month, warning that “knowing the limit in terms of the availability of building materials and labor force” was critical to sustainable growth.

But, according to figures released by the Middle East Economic Digest (MEED), the shortage may already be overwhelming.

“There is a chronic shortage of resources. Clients are facing a shortage of contracting capacity while contractors are having difficulty sourcing labor and materials,” a report by the MEED Contractors Survey 2007 stated.

“The result is soaring materials costs and wages, which in turn have seen project costs soar,” it added.

Nakheel, Dubai’s giant property developer responsible for The World and The Palm projects have identified the problematic supply bottleneck and taken measures to secure contracts for building materials

“We are formulating deals with contractors that will give us better protection from cost escalation,” Matt Joyce, managing director of Nakheel's Waterfront project in Dubai, told newswire AFP.

“We’ve spent a lot of time formalising ‘locked-in’ agreements for building materials such as steel. If you ‘lock-in’ with contractors early enough the price escalation risk can be removed,” he said.

Emaar, the Arab world’s largest property developer by market value and developer of the famed Burj Dubai, has also been forced to recognize that the global clamp down on building supplies may lead to project delays and even eat into profits.

The newswire reported Emaar as admitting that “pre-operating costs” would likely dampen expected revenue from malls and residential sales in 2008 and estimated that profits for the real estate giant would likely plateau during this year at around 3%.

China recently agreed to lock in contracts for 2009 steel at up to a 65% premium to today’s market price, asserting its intention to continue the nation’s rampant construction and sending a clear signal to rival emerging markets that it is prepared to pay up for priority material supplies.

But despite being the world’s single largest consumer of steel, China has recently become a net exporter. Although heavily reliant on Australian coal for production of the key construction material, China’s positioning as a priority customer for building resources is seen by many as a strategic play to outmaneuver competing Gulf nations.

Speaking at the Abu Dhabi Economic Forum, Soliman Demir, chief economist for Kuwait-based Gulf Investment Corporation (GIC), warned that Gulf producers must consider consolidation if they are to remain competitive.

“If you look at the industry in the GCC, the picture is not encouraging... You can not survive if you are small,” Demir said.

“The ten largest companies [in the world] represent about 27% of global steel production,” Demir said, adding that only three companies in the whole of the GCC produce more than three million tonnes per year.

Adding to the woes of the Gulf’s construction industry is the increased competition for skilled and unskilled labour and the ongoing and somewhat controversial debate regarding Indian expartiate workers in the region.

India recently passed a law banning the issuance of visas for its citizens seeking employment in Bahrain unless they had secured contracts valued at at least 100 dinars ($257).

The subcontinent, prompted by calls to secure the rights of its exported labour force, also threatened to sever the supply of its workers to the rest of the region unless other Gulf States endorse similar minimum wage initiatives.

The UAE may be at particular risk of a potential downturn as the oil-rich state has diversified much of its energy-based economy in recent years into real estate and commercial development and relies heavily on expat labourers to construct its ambitious projects.

It is estimated that expats make up around 80% of the entire UAE workforce with a large majority holding positions in the construction industry.

The Emirates-wide construction boom accounted for almost one quarter of the entire country’s GDP in 2007, according to official figures, leaving the economy acutely vulnerable if the property market collapses or even slows.

Research firm, Proleads, calculated the value of ongoing and planned construction projects in the GCC at around $2.5 trillion.

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