More cement shortages likely as building boom surges ahead

Cement shortage was probably the number one issue facing the construction industry last year. CW looks at what actually happened and learns that this year may be no better.

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By  Colin Foreman Published  February 19, 2005

More cement shortages likely as building boom surges ahead|~|60 prod body.jpg|~||~|Material prices dominated every conversation last year. First it was steel, with speculation that many of the region’s biggest projects would be delayed, or worse still even scrapped as they became too expensive to develop. Later on, cement prices dominated the headlines, and as summer approached, many projects were facing delays as supply shortages and soaring prices meant that deliveries were simply not being made. In February prices had peaked at US $63/t and by April they had risen again to US $71/t. This was bad news for contractors who first had to pay almost extortionate prices for cement, and then faced the danger of delivering a project late and incurring penalty clauses from the client. In many cases, this turned a profit-making job into a loss-making one. Eventually, the region’s governments stepped in to restore some calm. The Qatar National Cement Company (QNCC) was one of the first to react when it decided to start importing cement to cover the shortfall in supply. Shipments of 17 000 t/vessel came from the Indian west coast, together with some supplies from neighbouring Saudi Arabia. One of the first governments to intervene was Oman, which in June banned all exports. This effectively settled prices as it ensured that all local cement stayed within its borders. Producers had previously enjoyed high prices in the UAE’s boom towns like Dubai where the prices paid for cement were substantially higher than those paid in Oman. Oman was able to act so effectively because it — along with Saudi Arabia — is a net exporter of cement. The government later claimed that the measures succeeded in curbing the hike as the sultanate enjoyed cement prices that were 40% less than the region-wide prices. The rest of the GCC countries were not so lucky as they are all net importers of cement who fail to produce enough cement locally to satisfy demand. In the UAE a 50 kg bag of cement that had been AED6 to AED7 at the start of the year had become AED12.50 to AED12.75, and 1 t of mixed cement had risen from AED125 to AED250. Alarmed by the increases, the UAE Contractors Association held three consecutive meetings in Abu Dhabi, Dubai and Sharjah to review the situation and blamed building material suppliers and urged authorities to intervene, saying that if the price rise was not controlled, it would seriously harm the industry. Initially there was little in the way of a response but by late June the problem was so grave that prices had reached AED340/t and the authorities began to acknowledge that some intervention was necessary in order to prevent the industry from stalling. Sharjah was the first emirate to act as it began to investigate the best course for any intervention. Imports also began to flow in as ready mix suppliers began to secure deliveries from overseas. Given the amount of ongoing construction work in the UAE, these deliveries were of limited effectiveness but they did at least go some way to easing the situation. By August the UAE Contractors’ Association had successfully brokered a deal to import 40 000 tonnes of cement into the emirates from Indonesia. The cement was brought in at AED200/t or about AED220/t after tax; creating a 21.5% saving on the market price at the time of AED280/t. The association brokered the deal in response to its members’ belief that the market prices were unfair and that cheaper sources of cement from overseas could be found. The first shipments came from Indonesia with later deliveries from producers in Egypt. Later in the summer the authorities agreed to waive the 5% duties charged on imported cement. The authorities were keen to act after it was realised that many projects were in danger of running over budget, and as contractors strive to cut costs the temptation to procure cement from black market suppliers was a real danger. Similar problems were addressed in Qatar, where the authorities imposed fresh legislation that required cement to undergo testing to ensure that it meets the necessary standards. The legislation made it mandatory for imported cement to pass a quality test to qualify for use. These steps were taken because of the rapid increase in the volumes of imported cement. Although the prices appear to have stabilised now the basic principles remain the same: the underlying cause for the shortages and price hikes last year was that supply was grossly outstripped by demand. The claim that cement producers took advantage of this situation is also probably valid to an extent; it was more of a case of making matters worse than actually influencing events. Even the most casual of analysts must realise that the current level of construction activity in the region shows no signs of abating, and if the recently announced projects in Dubai are anything to go by then the region will be busy for many years to come and the demand for cement will continue to grow. On the supply side, capacity is being added by many of the region’s producers, but this takes time to install and have any real affect, and as already mentioned the majority of the GCC are already net importers of cement anyway, so there is a tremendous shortfall to make up. Imports will also alleviate the problem, and as the region moves ever closer to WTO (World Trade Organisation) membership then competitive imports from large cement producers like Iran and Egypt become more of a reality. According to research by HSBC Bank Middle East Ltd., the shortfall situation present in the market is likely to continue over the next few years. The research took four different demand scenarios and, using the figures for expected capacity increases amongst the regional suppliers, calculated whether demand would outstrip supply. The demand scenarios used were 8%, 10%, 12% and 15% growth per annum. Under each scenario there was a shortfall in demand, and given the fact that the growth rates are not overly conservative it would seem that the industry will have to face another tough year when it comes to procuring its cement.||**||

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