BY Satish Kanady
As Qatar gets ready to launch signature projects related to the 2022 Fifa World Cup, the country’s construction sector is facing multiple market challenges. Reinforced quality checks, tightened environmental regulations and delays at port berths are expected to badly hit the supply chain of primary construction materials, leaving the market volatile.
Qatar is expected to launch at least 545 mega projects under various government-supported agencies alone before 2022. All of them are set to start simultaneously. The construction sector needs a mammoth volume of primary materials. The local market is capable of meeting demand for materials like cement, steel and sand to a certain extent. But it will face serious challenges in procuring key materials like gabbro and limestone, which are mainly imported from the United Arab Emirates.
Since the projects will be concurrent, the country’s construction sector is expected to experience huge demand-supply gaps in other materials too, including precast concrete, asphalt, ready-mix, bitumen, fine sand and washed sand, cement and steel, say market sources.
Projected demand for gabbro is a huge 264 billion tons for the next few years. Demand for limestone will be an estimated three million tons. Sources told The Peninsula that the handling capacities of the gabbro exporting berths in the UAE and the delivery berth in Qatar were limited to three vessels at a time.
Qatar’s demand for gabbro and limestone will reach its peak during 2014-16, when Qatar’s gabbro berths will have to handle 60-80 million tons a year. The existing capacity of the gabbro berths in Mesaieed, operated by Qatar Primary Materials Company (QPMC), is just 20 million tons.
Last week, QPMC signed a contract with FLSmidth and Six Construct for expansion of the gabbro terminal. The project is due to be completed in 29 months and QPMC is expect to increase the discharge capacity at the gabbro berths to 30 million tons a year. Sources in QPMC said there were plans to develop small jetties in Mesaieed and Lusail to handle the extra shipment of aggregate.
“Supply chain break is going to be a huge problem for Qatar’s construction sector in the middle and long term. During the peak months of construction activity in 2008, there were several occasions when vessels were forced to anchor for more than a month, waiting for their turn to deliver the materials at Qatar’s gabbro berths. With the simultaneous launch of huge numbers of mega projects, the number of shipments will swell in the coming years and Qatar’s ports will face huge delays in deliveries. Adding to the woes is the recent hike in demurrage. It has gone up to $70,000 from $50,000”, said a business leader who did not want his name in print.
Qatar’s construction material market is already reacting. Prices of gabbro have gone up 20 percent over the past few months. There is also a slight uptick in the prices of bitumen. However, cement and steel prices are relatively stable.
“With Qatar tightening quality checks on construction material, the supply of gabbro has got further restricted. Currently we have enough stock. But once the project works gain momentum, we might face supply problems, leading to a hike in prices. Since quality limestone is available within the country, we do not foresee any problem in the limestone market”, said a retailer.
The price of ready-mixed concrete, projected demand for which during 2014-15 is an estimated 12 million tons, is also stable. “We expect the demand will reach its peak during 2015-17. With the project works picking up the prices will certainly go up. The year 2011-12 was not a good time for the ready-mix sector. We expect things will improve from next year”, said Maheshwar, an executive at Qatar Alpha Beton.
As for steel, since government-controlled Qatar Steel has a monopoly in the market, distributors are clueless about future prices. The current price of rebar (10 mm-32 mm) is QR2,840 a ton. The price of 8mm rebar is slightly up. Currently the market is dull due to various reasons, including huge delays in payments by construction companies. The market is banking heavily on the World Cup-related projects, which are yet to pick up, said a leading steel distributor.
But industry leaders warn that given Qatar’s huge projected demand, prices of construction materials, including steel and cement, will definitely go up in the mid and long term, though not in the short term.
“The prices might not go up in the short term, but they are likely to go up with increasing demand. With the country having a monopoly in steel and cement, the prices may be more or less stable. But we do not know how the market is going to react when demand reaches its peak”, Ahmad Jassim Al Jolo, chairman of Qatar Society of Engineers said.
“The market dynamics will definitely change when the mega projects kick in. The government needs to do close monitoring of the prices. Any possible disruption in the supply chain will upset the market, leading to demands for escalation of the original project costs”, said Nasser Al Mir of Qatar Chamber.
“As of now, the market is stable. But since almost all key projects are expected to start simultaneously, I expect huge demand-supply gaps in some primary materials. Gabbro is going to be high in demand. Now, Qatar has tightened the quality of gabbro to be used in the projects. If reports saying that the exporting countries are going to tighten mining regulations are true, the situation will worsen further”.
In view of the expected shortage in supply of gabbro, Nasser Al Mir suggests that the government permit construction companies to replace gabbro with limestone in selected non-structural projects.
Nasser Al Mir believes the government may not be able to control the market in the event of a huge demand-supply gap. The government can intervene to a certain extent in the case of cement and steel, on which it has got a monopoly, but prices of other primary materials will be dictated by market forces. He said in the event of an escalation in prices, contractors will be forced to enhance their original project cost. The authorities must understand the full spectrum of the country’s construction scenario, he said.
Prices of gabbro, which have already gone up a bit over the past three months, are expected to rise further in the coming years. The current price of limestone (10 mm) is QR40 and that of gabbro (10 mm) is QR80. The prices of these primary construction materials were slightly lower three months ago”, said an executive with a leading construction material retailer.
The price of ready-mix, projected demand for which during 2014-15 is an estimated 12 million tons is stable.
“We expect demand will reach its peak during 2015-17. With the project works picking up the prices will certainly go up. The year 2011-12 was not a good time for the ready-mix sector. We expect things will improve from next year”, said Maheshwar.
Market analysts have already forecast that construction costs will go up. The country’s construction inflation could peak at 18 percent during the World Cup building boom between 2016 and 2019, says global consultancy E C Harris in its latest report. By 2021, the value of the construction industry is forecast to almost double to $1bn per annum in real terms, it said, quoting Business Monitor International figures.
According to the Tender Price Index for Qatar, prepared by MEED Cost Indices, construction costs in 2017 will be 18 percent higher than current price levels. The rise in costs will put a strain on Qatar’s supply chain and will ultimately have an impact on the value of contract awards from 2013 onwards, reaching a peak of $40bn in 2017.
Last March, authorities announced that Qatar will be launching an index which will monitor the pricing and availability of basic construction materials on a monthly basis and issue alerts if there are shortages. Cement, steel, coarse and fine sand, limestone, bitumen and crushed stones are supposed to be included in the index. Market players are still waiting for it.
The government has put the cost of construction projects to be launched for the Fifa event at a whopping QR584bn over the next 10 years.
The Ministry of Development and Planning and Statistics conducted a survey on future demand for primary building materials at the request of a committee created to monitor supply and demand for primary materials until 2022.
The survey found demand for construction material would peak during 2014-22, and it would account for more than half the total demand for materials during the 2012-22 period.
For the period 2012-22, limestone is the material with the highest estimated demand of 515 million tons, followed by gabbro at 264 million tons.