Gulf construction feels heat of supply shortages
The Gulf's booming construction industry is feeling the heat of soaring materials costs and labour shortages amid concern that supply pressures could delay the completion of projects.
The economy minister of the United Arab Emirates (UAE), whose construction and real estate sectors contributed 23 per cent of the economic output in 2007, has warned that supply constraints might slow construction in the area.
"Regional and international factors that could unexpectedly cause a recession (in construction) should be watched, Sheikha Lubna Al Qassemi told an industry conference in Abu Dhabi earlier this month.
Among the critical factors were "knowing the limit in terms of the availability of building materials and labour force," he said.
Construction in the Gulf, currently valued at $2.4 trillion, has been hit by increased worldwide demand for building materials, as construction fever spreads to countries such as China.
The Gulf region has experienced its own building frenzy over the past few years on the back of record-high crude oil prices, which are pumping huge liquidity into the economies of Gulf Cooperation Council (GCC) countries.
It was research firm Proleads that in November quoted the value of Gulf construction projects at $2.4 trillion. This would rise to $2.5 trillion, if projects currently only at planning stages were included, it added.
But this building boom in GCC member states -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE -- has put extra pressure on the supply and cost of construction materials and labour force.
"There is a chronic shortage of resources. Clients are facing a shortage of contracting capacity while contractors are having difficulty sourcing labour and materials," said a report by the Middle East Economic Digest (MEED) Contractors Survey 2007.
"The result is soaring materials costs and wages, which in turn have seen project costs soar," it added.
Giant UAE property developer Nakheel said it was trying to offset the unexpected escalation in materials prices in pre-arrangements with contractors.
"We are formulating deals with contractors that will give us better protection from cost escalation," said Matt Joyce, managing director of Nakheel's Waterfront project in Dubai.
"We've spent a lot of time formalising 'locked-in' agreements for building materials such as steel. If you 'lock-in' with contractors early enough the price escalation risk can be removed," he told AFP.
Dubai-based Emaar, the largest Arab property developer by market value, also acknowledged the impact of surging costs in January, saying higher "pre-operating expenses" would cut profits generated by malls and hotels in 2008.
The property giant, currently constructing the world's tallest tower, Burj Dubai, said its profits in 2008 would grow at the same three-percent rate as last year.
An Emaar spokesman told AFP that increased construction costs had not caused delays to projects being completed.
But others in the construction industry have a different view.
"For every 30 days of work, there is a delay ranging between four and 10 days," a Dubai-based industry source who requested anonymity told AFP.
"There are too many projects going on at the same time. You can't find enough skilled labour, while delivery delays affect all kinds of building materials," he added.
A Dubai Chamber of Commerce and Industry study found that demand for steel in the Middle East increased from 19.9 million tonnes in 2000 to 34.7 million tonnes in 2005. Steel production rose from 10.8 million tonnes to 15.9 million tonnes in the same period.
MEED's study said the price of steel increased 70 per cent in 2007 while cement prices jumped by 50 per cent in the GCC. That was apart from the delay in deliveries due to high demand.
Contractors are not the ones shouldering the extra cost caused by delivery delays or price surges. Property developers are ending up bearing the brunt, the industry source said.
Contractors are in fact making handsome profits in the Gulf region, which is attracting some of the world's biggest construction companies, according to the MEED report.
"With contract awards in 2007 topping $193 billion, contractors with a regional position were able to make the biggest gains," it said.
Gulf economies are meanwhile facing increased competition from other countries in need of skilled Asian labour.
Studies suggest that the gap between wages in the GCC and some robust Asian economies is closing fast, dampening the appeal of the Gulf market for skilled labour.
A series of strikes this month by low-paid Asian workers in Bahrain has been blamed on the erosion of their meagre earnings as the US dollar slides. It prompted contractors to threaten to stop hiring Indian labourers. (AFP)
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