Homes A steel shortage has been stealthily driving up the price of property - and threatens to cloud the Emirati dream.
The world may be facing a steel shortage, according to Lakshmi Mittal. Speaking in New York in June, the CEO of ArcelorMittal and Forbes's fourth wealthiest person in the world said: "There is short supply. All steel companies are running at full capacity." This scarcity is problematic not only for billionaire industrialists such as Mittal (if prices continue to rise at this rate for much longer he knows the construction industry will start looking for alternatives) but also for us homebuyers, whom it has been hitting where it hurts: in the wallet. Rising steel prices, along with growing prices for other building essentials such as cement, glass and aluminium, have been stealthily pushing up prices of newbuild homes around the world - but particularly in rapidly growing areas of the world such as Dubai and Abu Dhabi.
The figures make the mind boggle. They highlight just how much more steel is now costing the building industry compared with even a year ago. According to Balli Steel, in the last 12 months alone, prices have increased by 100 per cent, from around $1,000 to $1,500 (Dh3,600 to Dh5,510) per tonne. The Middle East, while not the biggest consumer of steel in the world - that honour goes to China - is its fastest-growing consumer. In the first half of 2008, Balli supplied almost one million tonnes of steel to the region, mainly to Dubai. It predicts the new property markets in the Middle East will expand over the next five years - particularly Abu Dhabi, Qatar and Saudi Arabia - requiring yet more steel. For the next three years alone, Saudi Arabia's major projects are expected to use 500 million tonnes annually.
"I would say that since 2004 we've seen a gradual shortage in steel, and that's been driven by growth in consumption in China and emerging markets," says Nasser Alaghband, the CEO of Balli Steel. "China gets through around 500 tonnes of steel a year, whereas the UAE is around five to six million. Roughly speaking, the volume we are producing has doubled since 2001. Abu Dhabi and Dubai are pretty similar markets in terms of type of materials they use - the main difference is that Abu Dhabi has a growing steel industry of its own."
"There's been a worldwide shortage of cement, glass and steel for the past 18 months now - even the price of scrap meal has gone up," says Oliver Hickey of the Profile Group, a developer working in Dubai. "Yes, it does have a knock-on effect on house prices. The price of everything is increasing right now - land especially." It may not only be a question of demand outstripping supply that has been fuelling house price growth in Dubai over the past few years, suggests Alex Upson of Cluttons, an agency selling property in Dubai to British buyers. "These increases in building costs may have been a contributing factor in the price rises we've been seeing in the UAE," he says.
Now, however, prices have gone up so much that developers are having to make the ultimate sacrifice and reduce their margins. "A developer likes to achieve a 30 per cent profit," says Hickey, who is selling projects on The World, Dubai Sports City and the Waterfront. "We know as a developer we can't sell at unrealistic prices, however, so the more likely outcome of this increase in construction costs is that the developer makes less money, not the consumer paying more."
Upson believes it's a recent change. "We've seen evidence of how developers have increased prices in line with the rising cost of construction," he says. "Until now, the result has been for developers to pass the increases on to the consumer. Now, developers are responding to pressure and taking lower margins. On average, prices in Dubai are slowing down. Of course, some pockets will continue to rise, such as Downtown Burj Dubai; elsewhere there is no evidence of prices dropping, but the increases are slowing down. This lack of steel, cement and other commodities is a real problem for developers and it's been very much a fact of life in Dubai for the past 12 to 18 months. In fact, building work has been prevented on a few projects because of it."
Steel accounts for around six to eight per cent of the total cost of building, says Alaghband, who points out that the price of aluminium has also gone up dramatically. This rise affects the UAE building market in particular, as developers here uses lots of aluminium in the external design of buildings, whereas other countries are more brick-based. Clearly, it's a number of factors that are driving prices up for builders, developers and, ultimately, homebuyers. Labour costs have also been rising, too.
"The price rise in commodities is not the only problem for housebuilders," says Upson. "There's also been a lot of publicity about poor living conditions for labourers. This is now being addressed, and labourers' pay is also being increased. As most of the labourers come from India and Pakistan, and the construction markets in their home counties are booming too, there is more competition for them to get work and earn money back home these days. This all means that the cost of labour has gone up. All this is now being passed on to the developer, when it would have historically been passed on to the purchaser."
So what will happen in the future? Will these increases bring building to a standstill? Hickey believes that suppliers will simply cope with the demand better in the future, and that master planners - who own land and sell plots to developers, after much due diligence to check they have the funds in place to support these rising costs - may have to start reducing their prices so building is still viable. "These commodities are not something that can run out - like natural gas - and in the future I think we'll see the relationship between supply and demand balance out," he says.
Ultimately, according to Alaghband, it all depends on the global economy. "As we look into the future, the question mark in my mind is global economic growth levels. I think if global growth remains over three per cent we will remain in a similar situation as we are now. If we dip below three per cent - and there is some concern now that this might happen - then we might even have a surplus of steel, and some of these other commodities. If I were a betting man, I'd put my money on steel prices this time next year not being significantly higher than they are now."