Cement Drying Up?

Qatar

Economic News

22 Jul 2010
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Despite the practically no-lose formula of mushrooming gas revenues and lofty national development ambitions, Qatar's construction boom has not been without its glitches. The fourth quarter of 2003 saw work at building sites grind to a halt as supplies of the vital ingredient - cement - dried up. A rash of new projects - and in particular the race to meet deadlines for the 2006 Asian Games - caused demand for the material to far surpass what could be produced by the country's sole cement supplier, the Qatar National Cement Company (QNCC).



With much of Doha resembling a construction site right now (by the time the games start, the city will have an entirely new skyline) the QNCC has not been able to meet demand from its domestic resources. In response, the company has moved quickly to bring in imported cement from the UAE, Saudi Arabia, India, Egypt and other countries to make up the shortfall. This represents a particularly galling turnaround for the Qatari building materials sector, seeing as the QNCC had been exporting cement up until 2001.



Some 43% of the company's shares are state-owned, while the rest are held by local institutional and individual shareholders. Given this state interest, and QNCC's strategic importance, the company is also subject to certain particular rules of conduct. Key among these is the stipulation that in return for its monopoly over the local cement market, the company is understood to have made national interests its top priority, ahead of its profitability at any particular point in time. This explains the shift to expensive imports.



By the end of 2003, this strategy had succeeded in meeting immediate needs and cement supplies in Qatar had been fully restored. But today imports continue to be needed in order to supplement the output of the QNCC's three plants, all at Umm Bab, near Salwa in the south-west of the country.



The current production capacity of QNCC is just over 1m tonnes per annum. Yet in 2000 they produced 1.21m tonnes, in 2002 1.35m tonnes and in 2003 1.4m tonnes. QNCC officials justify this disparity between capacity and actual production by noting that certain production and stock from the previous year are accounted for in the following year.



Expansion of these facilities is currently in the planning stages, with construction set to start in June 2004 and come to completion in June 2006. This expansion will double capacity, as the new facilities will also have an annual capacity of around 1.2m tonnes.



Importing cement to cover domestic shortfalls is not cheap, however. As a result, to meet the cost of imports, QNCC was forced to raise the price it charged contractors for cement by 30%, company officials explained. Yet some contractors have interpreted the price rise differently, saying the company is taking advantage of its monopoly to extract more cash from the market.



Prices for a 50 kg bag of ordinary cement at the production level averaged QR9 between 2000 and 2002. But in 2003, this climbed to around QR9.5 for the same weight. When this was passed on to the consumer at the retail level, the price for a 50 kg bag averaged between QR10 and QR13 in 2003, and is currently fluctuating between QR15 and QR20.



Construction firms are nonetheless required to carry out work, as agreed, at exactly the prices they accepted before the cement price jumped up, industry sources say. This has undoubtedly put a strain on firms that had won jobs based on low price tags in their bids. According to the October 2003 edition of the Middle East Economic Digest, contractors were undercutting each other by 15-20% to win new municipal works and petroleum-related contracts.



Yet, at its annual general meeting on April 7, 2004, QNCC decided to award its shareholders a cash dividend amounting to 40% of nominal share-value plus 25% of capital. The QNCC chairman said the company had recorded a net profit of QR115m in 2003, compared to QR105m the year before. At the same meeting, the company increased its capital from QR102m to around QR127m, The Peninsula reported.



Construction accounts for 3.8% of Qatar's GDP, with a growth rate of 2.1% per year at current prices, according to the economics and research department at Qatar National Bank. Budget surpluses over the past three years have permitted a sharp increase in spending on public projects, which generate the bulk of construction work in the country. Total allocations for public projects increased by 40% to QR6.1bn under the 2003/04 state budget.



Lead contracts for major projects are regularly awarded to international construction and engineering firms, though almost always with the stipulation that subcontracts be given, at least in part, to local companies. Qatar's numerous construction firms include many linked to the main family-controlled trading and contracting groups; some of these have becoming increasingly specialised, with strategic links to international firms. In general though, most local firms still lack the capability to undertake sophisticated projects - though one firm seems more than capable of making a profit from the cement malaise.

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