Duty waiver will cut construction costs
The jury was out yesterday on whether the abolition of customs duty on cement and steel would put the brakes on soaring construction costs.
Traders and contractors told Emirates Business the move would have little short-term effect as 90 per cent of locally used cement was produced in the UAE and most steel importers do not pay duty.
But the decision was welcomed by property developers who said it would help bring construction costs down. The UAE Government on Sunday announced that the five per cent duty on cement and steel would be removed throughout the country following a similar order by the Dubai Government.
A decree ordering a temporary lifting of the levies in the emirate to control the rising cost of building materials was issued last Thursday by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai.
“There are several factors behind the soaring construction costs, and cement and steel amounts for almost 30 per cent of it,” said Imad Al Jamal of the UAE Contractors Association. “At present the most of the cement used in the UAE is produced within the country.”
Construction projects worth more than $1.3 trillion (Dh4.7trn) are under way in the UAE and annual cement consumption has increased from 2.6 million tonnes in 1992 to 17 million tonnes in 2007. Most of the steel used in the UAE is imported, with much of it coming from Turkey. “The move will come as a psychological advantage for contractors. Traders and manufacturers will now know that the government will intervene to stabilise the prices. It will also open the doors for massive imports which could effect medium-term prices,” said Al Jamal.
But Rizwan Sajan, Chairman of Danube Building Materials, said most importers had never paid customs duty on steel imports because the material was delivered in an unfinished form and so did not attract the levy.
“All major importers offer a cut-and-bend facility where the imported steel is worked to meet the contractor’s requirements,” said Sajan.
“And since the imported steel has always been an unfinished product customs duty was always avoided.”
Steel prices have risen dramatically from Dh1,983 in 2004 to between Dh3,800 and Dh4,000 per tonne today. Industry sources say demand for steel in the Middle East is expected to increase from 70 million tonnes in 2007 to around 90 million tonnes in 2010.
The UAE alone imports more than six million tonnes of steel annually and Jebel Ali Port is the largest single rebar import centre in the world. “Steel plays a predominant role in determining the value of a project,” said Sajan. “Normally it is said 10 per cent of the construction costs are down to steel alone.”
He said the main reasons for the escalating cost were high demand and a shortage of billets. “A serious shortage in the supply of billets has resulted in the increase of the price of rebar,” he added. “The increase in freight costs and the weakening of the dollar have also contributed to the fluctuation.”
But world steel production is projected to increase by 5.7 per cent in 2008 to 1.42 billion tonnes from 1.344 billion tonnes in 2007, according to steel consultancy MEPS.
Riad Kamal of Arabtec has gone on record as saying the removal of import duty on cement would have little impact on the price of the material.
But Behrouz Javaheri, Chairman of Saba Real Estate, said: “Waiving the duty is a very good move and will help bring down construction costs that have gone up significantly. The government’s move will alleviate inflationary pressure to some extent. But there is an urgent need to have more foreign contractors since we have a limited pool of resources and a tremendous number of projects.”
Hussain Sajwani, Chairman of Damac Holding, said: “It is a welcome move by the government and will augur well for the construction industry in the UAE.
“With the projected demand for steel to increase from five million tonnes in 2007 to 10 million tonnes in 2010 and with soaring cement prices, this move will help master developers like us to be in a better position to keep control over soaring project costs.
Ali Fakhruddin, Director of Fakhruddin Properties, said: “We hope the waiver will affect other sectors feeding the property development market in the country, particularly the combustibles sector, which heavily contributes to increasing the operational costs of property projects.”
The move is expected to eliminate the emerging black market for cement in the UAE and avoid delays to construction projects.
Globally the price of cement has been increasing steadily and has touched record levels. The price in India has reached $118 (Dh433) per tonne while in Russia it has skyrocketed to $280 per tonne. The construction industry in the UAE has witnessed a massive price rise.
Last July the cost of cement rose to more than around Dh370 per tonne. The UAE attempted to control the spiralling cost by introducing a cap for cement of Dh295 per tonne but on Monday cement in the UAE market was priced at Dh470 per tonne.
A senior official at the Union cement factory said there was insufficient locally produced clinker – a material used in the manufacture of cement – to meet demand.
“The only alternative is to import clinker – but why import clinker when you can import cement itself?” he said.
Several trading companies including Danube are planning to increase their imports of cement, especially from Pakistan.
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