Business | Construction
Construction materials price drop not helping contractors
With a recent freefall in prices of construction commodities worldwide, it would be easy to presume that contractors for once have something to smile about.
- By Jane Ferguson, Business Features Writer
- Published: 23:14 May 28, 2009
- A construction site in Dubai. The freefall in the prices of construction commodities does not translate to a boom in construction for contractors.
- Image Credit: Ahmed Ramzan/Gulf News
Dubai: With a recent freefall in prices of construction commodities worldwide, it would be easy to presume that contractors for once have something to smile about.
However, the good news pales in comparison to the overall hit contractors are taking from the downturn in the property market.
The cost of rebar, steel used in construction, cement and timber has fallen from massive highs reached six months ago.
In that period, rebar has dropped from around $1,500 (Dh5,505) per tonne to around $500 currently, timber has gone from Dh1,200 per square metre to Dh900 and plywood has come down from Dh130 per piece to Dh115, said Rizwan Sajan, chairman of building materials company Danube.
Soaring cement prices were cut back last May from some Dh24 to Dh25 per 50 kg bag to Dh17 after intervention by the Ministry of Economy, and remain between Dh16 and Dh17 currently.
"It is definitely becoming cheaper than six months ago," said Sajan. "Demand has come down, that is for sure."
In Dubai Marina it used to cost Dh1,500 to Dh2,000 per square foot to contract prime real estate, he explained. Now that has fallen to as low as Dh1,000. "At least 25 to 30 per cent you can save in the construction cost. Minimum."
Any stockpiles of such commodities are coming to an end, say those in the industry. "People were caught with a lot of stocks and stopped importing," said Sajan.
Riad Bsaibes, chief operating officer for Amana Contracting and Steel Buildings, agreed, saying that last summer suppliers overstocked.
Currently, he added, some say there is only about a month's stock of rebar left.
"Back in October there were talks of six months' stock," said Bsaibes.
At first glance therefore it would seem that contractors in the UAE are able to increase their margin. However, despite the chance to increase profits on certain contracts, those in the business say the existing market conditions and other factors far outweigh these possible benefits.
Many contracts still to be finished will have been signed by developers and contractors back when material costs were at record highs, said Shafiq Mohammad, purchasing officer at Core Construction Company.
So the dip in prices can be transferred into extra funding for them. "That's profit now," he said.
However, he talks of profit and loss in the same sentence, saying that the cost to the company of contracts that have been cancelled cannot be underestimated. "The profit is okay, but most of the projects are stopped."
Bsaibes pointed out that contractors already work on small margins, and comparatively the value of that margin to that of the contracts which have been put on hold is small. "So our overhead is already eaten up."
Asked whether the fall in commodity prices could help reignite any of those previously scrapped contracts, provided the contractors were able to quote cheaper prices for developers, Mohammad didn't seem optimistic. "Maybe they will start," he said.
Bsaibes added that some contractors would be able to transfer the savings into profit, but "in other cases the clients came back and renegotiated contracts".
He added that Amana "had to give some discounts".
With prices in buildings already finished easing, there are bargains to be had by buyers, especially in the case of distress sales. These prices can be impossible for contractors to compete with.
"You might very well find people selling below cost price," said Bsaibes, stressing that the imbalance in supply and demand in the market is the main challenge to all.
"That will trump any other factor."
Industrial construction is one of the only sectors which could reap the benefits of falling material coasts, he said, as delays are more rare and funding more available.
"These projects are less likely to get impacted," he said, "because they have to build roads and bridges."
The slight hike in steel prices does not mean there will be a return to last year's peaks.
Sajan pointed out that much has been made of recent increases in steel prices, which went from around $450 per ton in March to roughly $500 per ton in April.
Compared to $1500 just six months ago however, this is not a marked increase, he noted.
"If you look at it, the prices in April are better than March. But that's a marginal increase."
Bsaibes believes building material prices will not decrease any further.
"If there is any [further] drop it is going to be minimal," added Bsaibes. "I don't think the prices will go back to what they were a year ago."
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