Cement prices in the UAE have outrun the forecast for building costs
Buyers of construction work carry more of the risk of rising prices when a quoted price for some materials may be guaranteed for only about a month, and one cement producer says its average selling price is higher than a year ago.
For some materials, including steel, a quoted price may now be held for only around 30 days, Construction Business News Middle East reported this week. Buildings take rather longer than that to finish.
That short promise sits beside two numbers that pull apart. Since January, average cement prices have risen by 16%, TradeArabia reported, faster than concrete and twice as fast as reinforcement steel. Yet Gulf Construction reported on Oct. 1 that cost escalation in the UAE is forecast at around three per cent this year. Both figures can be right, because cement is one line in a budget. The likelier reading, however, is that the calm forecast hides a transfer: the risk of rising prices is passing from the firms that quote them to whoever pays for the building.
Swipe sideways to see the whole chart. The data is under it.
Show the data
| Item | Value |
|---|---|
| Cement | 16% |
| Concrete | 10% |
| Reinforcement steel | 8% |
Currie & Brown said in its latest UAE Construction Market Overview, as TradeArabia reported, that those quoting prices are less willing to hold them fixed for long periods. The result, it said, is shorter price guarantees, more conditions on tenders, the bids submitted for work, and greater use of fluctuation clauses. A fluctuation clause lets a contract price move with the cost of materials. Cement is not moving alone, either: TradeArabia's figures show concrete and reinforcement steel rising since January, while diesel prices have remained volatile.
Schedules are under strain as well as budgets. TradeArabia also reported that shortages in contractor capacity and specialist procurement are increasing the risk of delays. Construction Business News Middle East reported this week that requests for extra time to finish a job are becoming more common.
The other side of the sale
Where the extra money goes is easier to see from the other side of the sale. EMSTEEL, which sells both steel and cement, said in a second-quarter results release dated Aug. 27 that its cement division recorded revenue of AED 287 million and EBITDA of AED 75 million. EBITDA, earnings before interest, tax, depreciation and amortisation, is a rough measure of operating profit. Cement and clinker sales reached 1.1 million tonnes, the company said.
The growth rates behind those totals are the more telling part. Average selling prices for cement products, sales volumes and revenue each rose by a similar share from a year earlier, according to EMSTEEL's release, which credited continued strong market demand. Operating profit grew far faster than any of them.
- Rise in average selling prices for cement products
- 30%Year on year, second quarter; per EMSTEEL's release
- Rise in cement and clinker sales volumes
- 28%Year on year, same quarter; tonnes kept pace with prices
- Rise in cement division revenue
- 29%Year on year, same quarter; level with price and volume
- Rise in cement division EBITDA, a measure of operating profit
- 47%Year on year, same quarter; profit outgrew sales
Those rates do not multiply out. A division that sold that many more tonnes at prices that much higher would ordinarily report revenue growth well above either rate, not level with both. One possible reason sits in EMSTEEL's wording: the price figure covers cement products, while the volume figure covers cement and clinker, the half-finished material that is ground into cement. If so, the reported rise in prices may overstate what the average tonne earned.
Even on that cautious reading, the division kept more of each dirham it took in. Khaleej Times reported on Aug. 2 that EBITDA margin expanded to 26.1 per cent from 22.8 per cent in the same period last year. The paper credited strong demand and higher average cement selling prices. That margin matches the cement division's profit and revenue as EMSTEEL published them.
The whole company gained too. Gulf News reported on July 31 that EMSTEEL's net profit rose 157% year on year to Dh262 million in the second quarter. The paper said higher steel and cement prices, cost controls and continued demand from the UAE construction market supported the result. That suggests the increases are more than list prices; they are reaching a producer's accounts.
A calmer account
A calmer account exists, and it has evidence. Stonehaven's GCC Construction Cost Index said at the start of June that cement remained anchored at AED 280 per tonne, with no movement that week. The same issue said the index had eased to 125.69, down 0.60% from the week before. That is one week in one tracker. Separately, Gulf Construction reported this week that building activity in the UAE is expected to grow at a steadier pace this year, which could take some heat out of demand.
On that view, cement is one line among many, a weekly price can sit still, and short quotes reflect scarce capacity as much as dearer materials. The first quarter lends the view some support. Zawya, carrying a WAM report on May 13, said EMSTEEL's cement division recorded revenue of AED269 million and EBITDA of AED80 million in the first quarter. That works out to a margin of about 29.7%. Revenue rose between the two quarters; operating profit fell. Pricing power that was still building would probably have made the second quarter the richer one.
Materials are a large part of a building budget. Turner & Townsend said in its UAE market report for last year that materials amount to around 60 percent of the baseline cost of construction. That figure is last year's and covers all materials, not only the three TradeArabia tracked, so it does not show whether those rises break the forecast for the whole.
A forecast is an average
A forecast is an average, and a buyer on an unfixed price does not pay the average. A fluctuation clause passes each increase through as it arrives. A quote that may be held for only about a month has to be renewed at whatever the market then asks. Either way, the party that once promised a price now promises less, and the party paying for the building carries what is left.
Builders sit in the middle. Gulf Construction also reported this week that labour shortages and higher material prices continue to add delivery risk. A builder that has promised its client a fixed price while buying materials on short quotes carries the gap itself; one with a fluctuation clause passes it on. Delay would compound either position, since a late project buys its materials later.
Producers hold the other end, and their results offer the cleanest test. Suppose EMSTEEL's cement division reports a third-quarter margin at or above its second-quarter level, with selling prices still above a year earlier. That would show the increases sticking, and the unfixed prices would be a real cost. A margin back below the level of the second quarter a year ago, or selling prices no higher than a year before, would favour the calmer account. So would a longer price hold in Currie & Brown's next overview.
Cement is dearer, prices for some materials may be held for only about a month and one producer's margin is wider than a year ago. The forecast for the whole market may yet prove right. It says little about the risk a buyer takes on once the price stops being fixed.