Construction sector in the UAE witnessed a massive drop in costs during the past 12 months. Prices of most materials dropped by more than half compared to 2008.

Producers and distributors said they experienced a difficult year as reduced cost coupled with falling demand led to severe drop in revenues.

Most affected were ready-mix companies. Many of them had to cut their production by more than 50 per cent and send several staff on leave in order to reduce operational cost.

The UAE market experienced oversupply of cement and producers had to cut production, in an effort to bring down the excess cement in the market. By the last quarter of 2009 imports had drastically reduced.

Steel used in the construction sector also faced a similar fate. The beginning of the year witnessed a severe oversupply in the market, bringing the prices down by half.

Although the excess cement in the market had significantly reduced by the end of the second quarter, imports failed to pick up as demand continued to remain weak. Meanwhile, local producers said they had not reduced production as locally manufactured steel was sufficient to satisfy the domestic demand. Producers, however, said they had to severely reduce their profit margins in order to discourage further imports.

Cement
GCC cement sector earnings, after years of high digit growth, ended in 2008 on a grim note. Apart from a drop in demand, cost continued to put pressure on the companies, pushing down its margins as well as profits.

Overall the sector ended 2008 with an earnings decline of 35 per cent to $1.4 billion (Dh5.14bn) as compared to $2.2bn in 2007, according to a report by Global Investment House,

In June 2008, the Saudi government prohibited the export of cement to help reduce prices. Later in the third quarter of 2009 selective exports were permitted.

The beginning of the year itself witnessed a drop in cement prices in the UAE. Compared to the last week of December 2008, prices fell by about 10 per cent by mid-January mainly due to declining demand. In January cement prices in the UAE ranged between Dh340 and Dh400 depending on the urgency and payment method.

Factories contacted by Emirates Business said that the prices have been fixed at Dh360 per tonne.

Traders, however, were selling imported cement between Dh340 to Dh400 depending on the method of payment.

Following severe shortage and fluctuation experienced during the first and second quarter of 2008 the UAE Government had fixed the cement price at Dh360 per tonne and Dh16 per bag.

The UAE cement market showed good improvement in 2008. The total cement consumption of 17.24 million tonnes in 2007 went up to 21 million tonnes in 2008. Also daily sales of the cement producers group went up to 77,882 metric tonnes, which was the highest ever. It was around an average of 52,000 metric tonnes a day in 2007.

The government in February also decided to reintroduce five per cent customs duty on the import of cement and steel. The decision was made effective from February 15, mainly to discourage cheap imports into the UAE market.

By the beginning of the second quarter local cement companies were asked to reduce the price of cement by 22 per cent.

With effect from April 1, cement companies were informed that the new price has been fixed at Dh280 for a tonne of bulk cement and Dh14 for a bag.

The Ministry of Economy took the decision in co-ordination with the Cement Producers Group. The decision to revise the price was taken with the conditions prevailing at that time.

Speaking to this newspaper Mohammed Ahmed bin Abdul Aziz Al Shihhi, Director-General of the Ministry had then said: “We had a previous cap on cement prices. But the prices of oil and raw materials have gone down, which prompted us to revise the prices,” said Al Shihhi.

“All cement factories have been informed about the new price levels and we will once again send a reminder,” he added. Although the factories did not immediately comply with the new price cap, prices dropped by about six per cent in mid April.

Bulk cement was being sold at about Dh300 to Dh310 per tonne, while prices of cement per bag dropped from Dh16 to Dh15.

Meanwhile, cement imports continued into the UAE. Deliveries from Pakistan landed in the UAE at about $65 per tonne.

Adding $2 as the transport cost to customers meant a price of $67, which was still very competitive with prevailing prices in the market.

The third quarter witnessed further reduction in prices as it dropped to around Dh260-Dh280. The quantity of imports had meanwhile reduced.

By fourth quarter the prices fell further. Prices of cement had dropped to around Dh220-Dh225 in Dubai whereas in the Northern Emirates it was priced between Dh170-Dh190.

The price of a cement bag in Dubai had dropped to Dh13-Dh13.5, while in the Northern Emirates it was lower by about Dh12.

Officials said that extreme competition compounded by fewer projects were the main reason for the drop in cement prices.

Cement imports into the UAE have dropped significantly. Earlier this month this newspaper reported that imports reduced due to the drop in prices of locally produced material and excess stock. Producers and traders in the UAE said they were preparing for more tough times ahead, as they continue to remain clueless about the future course of the construction sector.

Meanwhile according to sources, prices of clinker have also dropped during the past few months. It has gone down by about 10 to 15 per cent compared to the last quarter.

Ready-mix
Prices of ready-mix too bottomed out in Dubai and other emirates. The mix was being sold at as low as Dh200 per cubic metre.

The readymix industry in Dubai and the Northen Emirates has been the hardest hit in the global crisis with sales dropping severely and companies reducing profit margins to a bare minimum in an effort to attract customers.

Officials earlier said that the industry is going through a rough patch with production levels at its lowest as many projects have been either suspended or put on hold. They added that in some of the firms, almost 90 per cent of trucks continued to remain idle.

Prices of readymix concrete vary according to specifications prescribed by different projects and industry officials said that cost has dropped by more than Dh150 per cubic metre in the second half compared to the first half of 2009.

Another official said that concrete prices have already bottomed out and it cannot be sold any cheaper unless the supplier is willing to sell it at a loss.

“There is no profit margin left in the industry. The current price is just sufficient to manage the operational cost of the plant and pay the workers’ salaries,” said a readymix firm executive.

Steel
Prices were usually moving around $460 to $480 during the first two quarters following a massive collapse in October and November of 2008. With an ongoing construction boom across the country, the year 2008 began with rebar prices at $760 per tonne in January, gradually moving up to $770 in February, $840 in March, $1,025 in April 2008 and reaching the peak of $1,540 in July 2008, after which it started its downward slide. It, however, remained more than $1,000 until September 2008.

Prices during the first half of 2009 had been fluctuating. The year started with rebar prices at$485 in January, from $460 in December, increasing to $510 in February before falling to the lowest price (for the past two years) of $420 in March. Rebar prices again moved up in April to $455 and increasing further to $495 in May and falling again to $455 in June.

By the third quarter rebar prices had shot past $500 per tonne for the first time since February this year and has reached the highest since November 2008.

Industry analysts, however felt the increase could be temporary as there has not been enough evidence of real growing demand.

“Prices had been relatively steady during the past two months. It looks like they are moving into a very unstable phase again,” Karel Costenoble, Manager at Mesteel had told this newspaper in August.

Billets prices also increased from $460 during the first week of July to $480 per tonne in August. It touched its lowest price of $333 in March – the lowest during the past two years.

Currently, the demand for steel in the country remains soft as work on several projects continues to remain low key.

The prices however has been marginally increasing. While rebar was priced at $475 per tonne in November, by the second week of December it increased to $495 per tonne. “Very soon, we might witness a further increase following an increase in the price of scrap,” said Costenoble.

Local producers had also increased the steel prices. Ajay Aggarwal, CEO of RAK Steel, had earlier told this newspaper that a price increase locally was inevitable. “The demand remains the same. However, local manufacturers have to make some profit and it is bound to reflect in the pricing strategy,” he said.

Meanwhile, the prices of universal beams and columns have also moved up from $580 per tonne to $600 per tonne. Japanese beams are priced at $540 per tonne CFR Dubai, said Costenoble.

The drop in prices of building materials had a similar impact on overall cost of construction. In Dubai the construction cost per square foot dropped from a high of Dh1,200 per square foot (core and shell residential) in August 2008 to between Dh280 to Dh300 per sq ft in general.

Contractors’ profits also came down from 15 to 20 per cent to between eight and 12 per cent.

By the second half the newspaper reported that the commercial core and shell construction costs have come down by an average of 60 per cent from October 2008 to a low of between Dh220 and Dh260 per square foot.

By Joseph George

© Emirates Business 24/7 2009

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