Prices Going North

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These are boom times for the UAE's construction sector, with order books bulging and contractors racing to keep up with demand. Yet this surge is also leading to hikes in building costs, with energy playing a key role in the rising prices.



According to one recent report from, the number of construction contracts in the Gulf Cooperation Council (GCC) almost doubled in 2005. The total value of these deals reached over $60bn.



Much of this growth is due to Gulf governments spending their oil windfalls on infrastructure upgrades. With hydrocarbon prices edging up in recent months, budget surpluses have been expanding to allow the Gulf's economies to go on a spending spree.



Much of their investment is aimed at establishing globally recognised tourism, finance and real estate sectors. Several years of prolonged record crude prices have helped to push this strategy forward.



The UAE has long been in the lead in this strategy, with its investments in infrastructure bringing on a major construction boom, particularly around Dubai.



Now though, the boom has spilled over into the neighbouring northern emirates, where contractors are experiencing a glut of orders.



"Three years ago it wasn't so busy," said one contractor in Ras al-Khaimah. "But now we have too much work. Dubai is sending us tenders, but we cannot spare supplies."



Building during this hydrocarbon euphoria, however, is not without consequences. Escalating oil prices have brought escalating construction costs at almost every phase of the process - from the tender phase to finishings.



One example of this is the price of fuelling heavy machinery. With oil prices at record highs, the cost of diesel has shot through the roof - going up twice in the past month to hit Dh8.7 ($2.37) per gallon in May. This was nearly 100% up on its price at the start of May 2005.



With the sheer number - and scale - of projects sprouting up, the cost of almost all basic materials has also been rising.



Steel, which used to cost around Dh1600 ($435.70) per tonne, now trades on average around Dh2200-2300 ($599-626) per tonne, according to UAE buyers, and can cost as much as Dh2800 ($762.44) for the most expensive grades. Cement, which previously cost Dh9 ($2.45) a bag, now costs over Dh15 ($4.08).



These hikes have led to criticism from many consumers, provoking producers to defend their prices as an inevitable reflection of market conditions.



"Now cement costs around $70 per tonne... which is reasonable," said Magnus Dalen, general manager of Ras al Khaimah-based Union Cement Company. "Normal operating costs should be $60 per tonne, which will give you a small margin, but the cost of oil is cutting into profits."



Consequently, contractors have been passing on the boosted costs to customers. Northern Emirates companies confirm that it is not uncommon for highly coveted contractors to enter bids 20-30% over the initial budget.



At the same time, with the potential for large jumps in costs in short periods of time, contractors also defend their high tender prices as reflecting market volatility.



"This is why costs are up," said the northern Emirates contractor. "It isn't for profits, but to mitigate risk."



Part of this risk is the general threat in the Emirates of future hikes in electricity bills, which would push up costs across the board. The UAE intends to generate more and more of its power from gas-fired stations, yet the cost of gas is likely to rise as subsidies come off and prices begin to reflect market levels.



As in other countries, the rising cost of energy is driving up costs across the market. While a major global energy producer itself, the UAE is not immune from such price hikes.



Until oil prices begin to ease, heavy demand begins to ebb and gas supplies become more diversified, the high construction costs seem to be here to stay throughout the Emirates and the Gulf.

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