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UAE contractors chase lower cost imports ahead of VAT

On key building commodities, they are placing bulk orders now with overseas suppliers

Image Credit: Reuters
A worker at a steel mill in China. On products like steel and value-added products, contractors say they are able to get cost advantages from imports and despite the 5 per cent import duty.
Gulf News

Dubai: UAE contractors are placing bulk orders with overseas suppliers of building commodities, especially those from China, to better manage their costs ahead of the VAT (value-added tax) roll-out. Even if that means placing fewer orders with local manufacturers of steel bars and other key requirements, industry sources say.

On products such as steel and value-added products, contractors say they are able to get cost advantages from imports and despite having to pay the 5 per cent import duty. The fact that dollar’s been strengthening of late has also reduced the import cost factor for local contractors.

The benefits from relying more on imports vary on a product by product basis. “There is greater variability when it comes to materials such as tiles and sanitary ware, where the differential between import and local sourcing can be as much as 25 per cent,” said Alireza Alladin, Director at the project consultancy Unitas. “For steel and cement, the differential is much smaller.

“But in an environment of reduced margins, every saving helps.”

There is a rationale behind the contractors’ search for the lowest cost points. With the launch date towards VAT ticking, project promoters have made it clear that any sudden cost escalation on building material prices after VAT will have to borne by the contractors. So, where possible, contractors are placing the orders now, and also getting the supplies on to their warehouses or project sites.

“On products such as steel, there has been a steady cost escalation in the last 12 months,” said Vinod Pillai, General Manager at RP Group, which has interests in real estate development and construction. “Currently, steel rebar prices are at Dh2,000-Dh2,300 a tonne, which is a fair bit higher than they have been in the past. The disruption in supplies from steel mills in Qatar has been one reason.

“But across the board, there has been a pick up in project activity in the UAE, and not just the mega constructions. It’s an across the board gains we are seeing.”

That local contractors are placing sizeable orders for imports will not have gone unnoticed by local/Gulf steel bar and pipe manufacturers. In recent years, they had committed major investments on additional capacities.

And they have been vocal about cubing import where possible through raising import duties. They have been petitioning the UAE Government regularly to raise the duty ceiling, through mechanisms such as the “safeguard duty” on top of the import duty. For their part, local authorities have instructed the construction industry to use locally made goods in government-sponsored projects.

But where such restrictions are not in place, contractors and project consultants are keen to place orders with the lowest-cost supplier.

“Imports have always been an integral part of the cost management process for contractors,” said Mohammad Mustafa, who heads the design and consultancy firm Emsquare. “This has become even more so as contractors strive to maintain margins in an environment of industry turbulence.

“Payment terms under boom days were between 30-60 days; they have in some cases extended to beyond 180 days, making it unsustainable for many of the smaller players.

“Thankfully, construction costs have remained broadly stable over the last two years. But this is expected to change and in fact changing already. Steel prices are moving higher internationally. What remains to be seen is whether this is something that will now spread across the board on commodity prices.”

Buying bulk right now is the solution for contractors

The next two months could see contractors pulling out all stops to ensure they get in more than enough supplies of key building materials. Those orders need to be delivered and stocked before the VAT launch date to be free from having to pay.

There has been a sharp scaling up in new project activity in recent weeks, and contractors are fairly certain how their order books will look. That means there is little risk of them being caught with excess stock from importing all of their short-term needs now rather than later.

Plus, as things stand now, building material prices are inching up, and with few signs of any sudden volatility pulling prices down.

As for VAT, apart from the initial teething issues, the construction industry believes it can assimilate the costs easily enough. “There has been some evidence of “bulk buying”,’ said Mohammad Mustafa of Emsquare. “For the most part, this has been at the margins because a) we are in a tight liquidity market and b) the bulk of the forward purchases can be done by the bigger players, which will likely enter the fray towards November/December.

“The heightened purchase activity is a function of capital as much as it is a function of arbitrage. The larger players have increased purchases, and yes there has been an increase in tenders awarded. This is essentially an arbitrage play.

“This kind of short term arbitrage activity was also witnessed in the days and weeks before Dubai Land Department announced an increase in transaction charges from 2-4 per cent.

“Certain players move in to take advantage of the situation, but smoothens itself out in the weeks after the new levy takes place.”

For information on the real estate sector within the UAE, please visit our sister site, getthat.com.

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