Prices of building materials have increased suddenly and has created a - temporary - hiccup in the UAE’s real estate and construction markets.
This might come as a surprise to many industry observers as the change on the demand-side doesn’t justify the increase in price. However, there is a reason… and let’s examine it.
Prices of almost all building materials products have gone up by 25-30 percent in the UAE. Steel prices, for example, have gone up from Dh1,800 a tonne to Dh2,600, while white wood has jumped from Dh600 to Dh1,000. The prices of oil and gas have also gone up.
To compound an already difficult situation, freight rates have increased manifold, in some cases from $1,000 to $4,000 for a container.
One of the reasons is that demand for raw materials in China and India went up after the factories opened post the COVID-19 lockdown. However, the real reason is that due to complete shutdown of factories in China, India and other countries – from March to June 2020 - workers had either left the area or relocated.
The lockdown saw sizeable material stockpiles at warehouses, and which have been used over up in the last seven- to eight months. So, when demand started to pick up from November- December, the factories weren’t ready to supply due to worker shortages or of resources, including raw materials, capital, etc.
So, supply-side issues have constrained the production and shipment and pushed up the prices. Normally, containers are always on the move. But due to COVID-19, the loaded containers were stuck at ports of US and other countries as rail and road networks were not functioning.
Pay more for same
The empty containers were not returning to China and had a cascading effect. As a result, end-users are paying more for the same quantity – at a time when funds are hard to come by. The timing of the price increase has added extra pressure on traders and end-users, making end-products more expensive at a very crucial time.
Once the market opened, demand for containers in China went up as other ports didn’t have empty containers to return to China. The lower volume of cargo added to the jump in freight rates, as containers were lying empty following a shipment and could not be utilised due to a lack of movement. So, we have ended up paying a higher price.
The increase in material prices is not due to increase in demand, but due to supply-side constraints caused by the COVID-19 related shutdowns.
What is the impact on traders? They are not able to give quotes with long-term validity as stocks are not available. But the price surge is temporary… and you can still serve the customers if you are having basic stocks.
The question is, what happens next? Importers in the US have started buying from Europe at a higher cost as their production demand has gone up. Freight prices too have slowly started to show a downward trend.
I believe this situation that will even out in the coming months.
- Rizwan Sajan is Chairman of Danube Group.