Preparing the ground: Materials prices remain a key issue, with a major uptick in development expected in the medium term

The slow construction market may have frustrated contractors, but it has provided plenty of opportunities for developers – both public and private – to build at a discount. Construction costs have come down considerably from the peak of 2008, when basic material prices were significantly distorted by an overheating market. However, while such prices have remained largely flat for the past year, there is concern a sudden spike in building activity, driven by preparations for the 2022 FIFA World Cup, could have an equally dramatic effect on prices in the coming years. Ghassan Barghouth, the area president for Qatar, Kuwait and Bahrain for Schneider Electric, told OBG, “It is very likely we face a situation where demand far outweighs supply and meeting delivery schedules will be key, the consequence of which will force prices of almost all materials upwards.”

STABILITY: Given the limited activity in the construction market in Qatar and the wider region, the fixation with material costs among contractors and developers has diminished. “There is not much difference between 2012 and 2011. The market is down, so we don’t see any scarcity. There’s a minor increase in the prices,” Atuul Bharadwaj, the senior project manager at Al Balagh Trading and Contracting, told OBG. “Rebar and sand are almost the same, and cement has seen a 1-2% increase. There has been an 8-10% increase on finishing items, such as wood and timber.”

Prices in April 2011 were around QR22 ($6) per tonne for sand, QR13 ($3.60) per 50 kg bag for cement and QR68 ($18.70) per tonne for concrete aggregate (all ex-warehouse). These are significantly lower than at the peak of 2008, when average cement prices across the GCC stood at $83.20 per tonne (around $4.10 per 50-kg bag), according to Global Investment House. Following the onset of the global financial crisis, cement prices in Qatar fell by 12% in 2009. However, the country still has the second-highest construction costs in the Middle East and the 15th-highest globally, ahead of the US, Russia and China, said consultants EC Harris in their “International Construction Cost Report”.

RISES AROUND THE CORNER: Furthermore, there is recognition among local players that these prices are only likely to increase over the coming years. “Construction costs will go up,” Seraj Al Baker, the CEO of Mazaya Qatar Real Estate Development, told OBG.

“There have been slight increases but nothing much yet. They have come down from the peaks of 2008 and we’ll definitely benefit from that, but the prices of materials will affect some returns.” The biggest concern is that excessive demand in the medium term, spurred on by the government’s development agenda, will push prices up towards 2008 levels.

As such, availability and development of building materials has become a key government concern. Navjot Singh, the business development manager at Qatar Primary Materials Company (QPMC), a government-owned firm charged with developing supply chain management for certain basic construction materials, told OBG that, “Every country has a critical product that is essential for it. Gabbro aggregate is a critical product for Qatar. It significantly effects revenues and has a direct impact on rentals and the cost of property.”

CAPACITY: The biggest challenge may be accessing the raw materials required for the production of cement and concrete. For many building products, Qatar seems well placed. In the steel sector, for example, Qatar Steel, the country’s largest producer, has a current capacity of 2m tonnes per year, and will add an additional 1.1m tonnes by 2013. Al Watania Steel will also add 400,000 tonnes capacity of rebar and coil to the market in 2012.

“The requirement for the next six or seven years, starting from 2013, will be very big. I’m sure local capacities would not be able to meet this demand,” Mohammed Ahmad Al Saadi, the general manager of Al Watania Steel, told OBG. “However, I don’t expect an increase in prices to the extent where the government needs to support these projects again and offer subsidies.”

This prediction is based on the high supply capacity in the GCC and the ability of producers to keep prices below the import cost of internationally priced steel. Similarly, local cement production should be able to cope with additional demand. “I see the current production of cement, at around 5m tonnes, as more than enough for the country,” Singh told OBG. The issue is the import of aggregates, gabbro and limestone for the development of cement and concrete in the market. “We have some limestone quarries producing for cement plants, but we will probably have to import limestone from now on,” said Singh. “The country is built on soft limestone and we have realised this is not that good for construction. Roads are popping and cracking. Also the environment is an important issue. Open pit mines in a small landmass would affect the environment greatly.”

STOCKPILING: This suggests Qatar may become 100% import-dependent for limestone and much of its aggregates. This in itself should not pose a problem, given that Qatar already imports the majority of its gabbro and that there is an abundant supply across the water in the UAE and Oman. The issue will be managing logistical issues associated with demand for aggregates. “The government is doing its best to stockpile essentials, so prices will hopefully not be the same as in 2006-08. I’m not expecting these dramatic increases, but gradual rises. The difficulty here is getting the materials into the market. This was the problem,” said Ammar Ammar, the business development manager at Al Jaber & Partners. QPMC has developed strategic reserves of 1m tonnes of washed sand and 2m tonnes of aggregate. It also plans to add an additional stockpiling capacity of 10m tonnes in Lusail and Ras Laffan.

ALTERNATIVE SOURCES: QPMC is also developing other policies to prepare for a significant increase in demand for cement. Given the country’s heavy dependence on the UAE, and specifically Fujairah, for gabbro supply, the company has been investigating the possibility of diversifying its sources by developing a relationship with Oman for its delivery.

Such moves will certainly help bolster supply conditions in the Qatari market. Nonetheless, Singh argues this is not the biggest issue facing the country. “It is not a question of the huge quantities that are required in terms of cement, sand and aggregate, it’s how you manage it. It’s a question of supply-chain management, not the availability of materials,” he said. According to Singh, the highly inflated prices for aggregate in 2008, that had such a dramatic impact on the overall cost of construction, were the direct result of inflated shipping fees and demurrage charges. He argues that these accounted for almost two-thirds the cost of aggregate coming into Qatar. While aggregate reached QR140 ($38) per tonne in 2008, the current stockpile price for QPMC is QR52 ($14) per tonne.

EFFICIENCY IS THE KEY: To stop this figure from dramatically increasing, Qatar needs to improve handling efficiencies to avoid potentially high demurrage charges from shipping companies. Such developments should minimise the demurrage charges facing traders and expedite the process of getting aggregate to clients. Qatar has learnt much from the building frenzy that peaked in 2008, and is much better prepared this time for the new increase in projects in the coming years.

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The Report: Qatar 2012

Construction chapter from The Report: Qatar 2012

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