Falling costs stall awards
16 July 2009
With clients delaying handing out contracts in the hope of securing lower prices, privately sponsored project activity is set to remain subdued this year.
Construction material prices are continuing to fall in much of the Gulf, but there are signs that in some countries prices have bottomed out since reaching a peak in the final quarter of 2008.
Data from the UK-based construction cost consultant Davis Langdon shows that prices for cement ready mix concrete, aggregate and diesel have all fallen in Qatar and the UAE since December 2008. Prices in Saudi Arabia remain stable, while in Lebanon – where a contraction boom is expected as confidence increases following the appointment of the new government –prices for some materials such as rebar (reinforcement steel bars) have risen.
Price Drops
The biggest recorded price fall between December 2008, when prices in the Gulf were at their highest, and June this year is in the cost of 50kg bag of cement bought in the UAE, according to Davis Langdon. The price fell to $4.10 a bag in June compared to $6.80 a bag in December last year, a 39.7 per cent decline.
The price of aggregate recorded the second biggest fall over the past six months. In Qatar, prices fell by 22.4 per cent from a high of $30 a tonne in December 2008 to $22.50 a tonne in June, while in the UAE, prices fell by 22.2 per cent from $22.50 a tonne to $17.50 a tonne.
While Qatar has been hailed b some construction companies as a healthy market – firms have relocated staff to Doha from Dubai to take advantage of the higher levels of building activity in the state – material prices have fallen more in some categories than in the hard-hit construction market of the UAE. For example, the price of ready-mix concrete fell by 1.4 per cent to $105 per tonne in the UAE between March and June this year, while in Qatar, prices fell by 13.5 per cent to $124.50 a tonne.
However, average projects costs have fallen more in the UAE than in Qatar. The data shows that the cost of building 1 square metre of gross leasable area on a five-star hotel project in Qatar fell by 5.7 per cent from March to June, to $1,400-1,900. But in the UAE, the price dropped even further, although from a higher cost base, by 8.38 per cent to $3,000 – 4100.
UAE tourism has been hit hard by the global financial downturn, with the hotel occupancy rate in Dubai in particular dropping to 73 per cent in the first quarter of 2009 from almost 90 per cent last year. As a result, many hotel building projects have been put on hold.
In Saudi Arabia, a record $127bn budget for 2009 means spending on infrastructure, energy and power projects is maintaining activity in the construction sector, and material prices have remained the same in all major categories. Cement, concrete, rebar, aggregate and diesel prices are all unchanged compared with prices in March.
In neighboring Bahrain, there have been both price rises and falls. The cost of cement rose by 3 per cent from $6.09 a 50kg bag to $6.25 between March and June of this year.
However, the cost of a tonne of ready-mix concrete dropped by 5 per cent, from $127.50 a tonne to $121 a tonne. The price of rebar dipped by 5.6 per cent, from $642.50 a tonne to $606 a tonne.
Major island reclamation projects such as Diyar al-Muharraq are feeding construction activity in Bahrain, but the price fluctuations suggest prices have not bottomed out as they appear to have done in Saudi Arabia.
In Lebanon, where the government has committed to spending $1.4bn on infrastructure projects, and where the Lebanese Company for the Reconstruction of Beirut Central District (Solidere) has a $5bn construction portfolio, prices are wither stable or rising. Prices in all major materials categories remain the same in Lebanon, while the price for a tonne of rebar rose by 7.2 per cent from $550 in March to $590 in June.
With 24 per cent of Dubai’s expatriate population employed in the construction and real estate sectors, the building slowdown has hit this demographic hard. As a result, the cost of labour continues to fall as employers retreat from paying the high wages of 2007 and 2008. Indeed, the UAE has recorded the largest fall in wages in the Gulf, according David Langdon’s data. In December last year, the average wage of an expatriate project manager was $21,000 a month, but that had fallen 13.8 per cent to $18,100 in June 2009.
However, this figure is still high compared with salaries in 2006, when a UAE-based project manager earned an average of $7,000 a month.
A local project manager in the UAE can also expect to earn less this year. Average pay fell by 8.6 per cent to $11,200 in June from $11,800 in March and a high of $13,000 in December last year. However, in Lebanon, Qatar and Saudi Arabia, wages for Project Managers were unchanged between March and June this year.
Tom Nixon, Operations Manager at UK engineering resource consultant Talascend, formerly EPCglobal, says that not all wages in the Gulf have fallen, but the sentiment among employers that they need to pay more to get the best people has diminished.
“There are so many projects on hold, people are being very cautious about what they are spending” he says.
However, Nixon points out that compared with other parts of the world, such as Europe and the US, there is “a lot more recruitment activity” in the Gulf.
Nixon identifies the recruitment market for senior engineers in Saudi Arabia is “quite buoyant”, with projects such as Jubail Industrial City, the largest civil-engineering project in the world, fuelling demand for skilled engineers. However with contractors bidding low for many Saudi projects, the knock-on effect on employees is that wages are not being offered at the levels of 2007, where an expatriate engineer could expect to earn $10,200 a month. This has now fallen to an average of $7,250 a month.
With clients watching every dollar, Nixon says, the skills in most demand are contract and claims management. A regional trend of introducing better standards of health and safety on major construction projects – particularly oil and gas sectors – means experienced health and safety managers are also in demand in the region. “Certain skills sets are undersupplied, so clients are willing to pay well to get the right people” he says.
However, there are signs that the days of expatriate engineers being employed on a lucrative contract basis, together with a generous relocations and expatriate package, are over, for now at least. “Contractors are looking for permanent staff rather than contracted workers” says Nixon.
For the construction workers who previously worked on real estate projects that have now dried up, there is some possibility of transferring their skills across to the power and oil and gas construction sectors. “There is some skills transfer from construction in real estate to oil and gas, but companies will probably just wait longer for the guys with oil and gas experience to come along” says Nixon.
The outlook for the construction sector for the rest of 2009 is an uncertain one. With the traditional summer slowdown taking hold over the Gulf, and Ramadan starting mid-August, many contractors are pointing to October as the month when contract awards and tender activity will rise.
But with evidence that materials prices are still falling in some countries, clients may be willing to ride out 2009 without any further contract awards in the hope that prices, and overall project costs, will return to the levels recorded three years ago.
