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In a past professional life I used to write about the oil industry. I habitually avoided the subject of price because, at the time, much as now, it was a volatile thing. Anything you wrote would be wrong by the time a reader got to it.
The same might be said of the commodity prices that affect the MEP industry. If I had any sense, I would steer clear of the subject, but right now it’s just a bit too tempting.
For one, a few months ago I’d never heard of Glencore, the commodity trader. The minor frenzy sparked by the build up to the company’s initial public offering (IPO) was an indication of its power to excite.
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A flat price debut may have taken some of the shine off, but the IPO did create a handful of well-placed new entrants to the world’s rich lists from the Glencore executive team.
The size and scale of the $10 billion Glencore equity sale shows that commodities are big business, with hunger for stakes in primary producers only just sating.
Investors in Glencore – who include Saudi billionaire Prince Alwaleed and his investment firm Kingdom Holding with a $400 million stake and Abu Dhabi’s Aabar Investments which committed $850 million - want a slice of what they see as being quite lucrative action.
If the clever money is heading to commodities then where does that leave the people relying on some of those commodities to do business in the MEP sector? For one, there’s a lot of talk about the danger of material price inflation slowing an economic recovery.
The formula is simple, cheap materials incentivise contractors to price low, thus keeping developers keen. A steep increase in the cost of key commodities could see developers putting their dollars away, or at least being forced to spend them more slowly.
The last point is the thing contractors don’t want to see. A steady and well supplied market in the GCC, where prices of copper wire and steel products are moderately predictable, will provide a much more stable foundation to build upon, than the wild price fluctuations that come from scarcity, combined with rising demand.
The simple fact is that no one is really sure where it will go. Some analysts had suggested that the Glencore IPO would herald the end of the commodities ‘super-cycle’, essentially a long period of high and rising prices. Others suggest that the years since the end of 2008 have provided a breather from a pricing roller-coaster that is about to take off again.
The International Monetary Fund has talked in terms of widespread resource scarcity, a view that supports the idea of more price rises.
While there was plenty of money made in 2006 through 2008, it was also a tough time to get hold of key materials. Given the current climate, that is not a situation many contractors would like to see repeated. It would certainly make it harder to stand by some of the best and final offers that secured those scarce contracts.
As always, developing mega-economies are partly to blame. China is big and ambitious and needs a lot of everything. While it sucks up resources, it doesn’t always use them as efficiently as countries experiencing less frenzied development.
In our own region, both Saudi Arabia and Qatar represent considerable demand, which can’t be readily supplied.
Metal prices continue to fluctuate, with copper and steel prices both influenced by raw material supply and sustained levels of demand.
Fluctuations in pricing for these essentials and the products they go into making, demonstrate the difficulty of making accurate predictions. The only thing we can expect for sure is change.
Stuart Matthews is senior group editor for MEP
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