Builders are facing high costs for key construction materials as the rising price of commodities deals a fresh blow to contractors already hit by a slowdown in new orders.
Steel price builds on cost woes
Builders are facing high costs for key construction materials as the rising price of commodities deals a fresh blow to contractors already hit by a slowdown in new orders. As the price of copper advanced to its highest level since August 2008, above $8,000 a tonne yesterday, construction companies have also been hit by a sudden rise in the price of steel, and also expect to start paying more for cement.
Steel prices have increased by as much as 55 per cent since early February after changes to the mechanism used to price iron ore on international commodity markets. Arvind Sharma, the managing director of Kwik Steel Structures, based in Jebel Ali, is one of many Dubai steel importers that have been caught by the price-rise and left sitting on inventory that is almost impossible to sell in the cash-strapped market.
The increase has nothing to do with demand, which has been low since the end of 2008 when spending on commercial construction projects began to slow because of the financial crisis. It has resulted from the world's three largest iron-ore producers - Vale, Rio Tinto and BHP Billiton- last week changing a 40-year benchmark system of annual price contracts to quarterly ones, linking prices to the iron ore spot market.
That has sent the price of steel soaring in the UAE to about Dh3,100 (US$844.9) a tonne from Dh2,000 in early February. The three companies control about 70 per cent of the world's iron-ore market. "This doesn't bode well for anyone in the project or manufacturing environment, where they're looking for a stable price," Mr Sharma said. "It's almost an oligopoly. As a result, we've not been able to forecast what the steel price is going to be. We're paralysed and so are our clients."
The change in the pricing system came after mines were unable to reach an agreement with Chinese steel producers on an annual prices benchmark. "Chinese mills, in general, did not have any yearly price contracts, so they started buying iron ore off the spot market," Mr Sharma said. "So the spot market doubled, and when the miners came into the talks they said they wanted twice the benchmark price because of the spot market.
"We're unable to firm up a price with the mills because they need exact details of each type of steel that is going to be needed for a project, and with the quarterly benchmark this is more difficult." But analysts predict that the steel price rise will not prove to be as drastic as the one between January and June of 2008, when costs in the UAE climbed from Dh3,000 to about Dh6,000 a tonne. By September of the same year, prices had fallen to Dh3,600 a tonne and reached Dh1,800 by the end of last year.
Markets such as Saudi Arabia and Qatar, where construction is more buoyant and governments are spending heavily on infrastructure, are expected to be hit the hardest by the price surge. "There's a lot of planned construction. Even if commercial development isn't going at the same pace, government spending will continue," said Rizwan Shah, a director of capital projects advisory for the MENA region at Deloitte.
Construction companies that have committed to fixed-price contracts could be hurt most by the increase because they will paying much more for the construction material than they priced into their tenders. "There is a tendency in this part of the world, not to have escalation clauses in contracts, so it's all a bit of a mess," Mr Sharma said. Contractors are also anticipating a rise in the price of cement, although they do not expect a return to the market conditions of 2008, when rampant inflation in the building sector hammered profit margins.
"Cement prices have to go up, they've been lying low for so long now," said Ani Ray, the country director of Simplex Infrastructures, a construction company active in Dubai. "This will be mainly due to lots of activity in China, India and Egypt." But Mr Ray was optimistic that steel prices will contract later this year. "I can see them coming down after the summer and Ramadan to about Dh2,500 a tonne, when activity is generally slow," he said.