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Material supply

The building materials market is valued at $145bn

Will steel supply keep pace with demand in the region?
Will steel supply keep pace with demand in the region?

The building materials market is valued at $145bn. Duncan Hare speaks to Frost & Sullivan about the impact of the building boom in Qatar and Saudi Arabia

Driven by the ambition of hedging from an oil-and-gas-based economy towards transforming into a hub for tourism and finance, the GCC region is projected to spend $452bn on infrastructure projects. In a typical construction project, the building material cost component is estimated at 33% of the total cost of the project.

Building materials used in the construction industry range from structural steel to cement and its by-products, wood (plywood, boards, timber, veneer, laminates), cladding, kitchen systems, sanitaryware and systems, glazing systems, MEP hardware (such as lighting, HVAC, fire and safety systems), door systems to flooring and ceiling systems and paints.

“Based on current and ongoing projects, the conservative market estimate for building construction materials is pegged at $145bn,” says Kumar Ramesh, Frost & Sullivan industry manager, environmental and building technologies practice, MENA and South Asia.

“At an aggregate level, the growing infrastructure investment is expected to drive the demand and growth of the building construction material industries in the GCC region.

To illustrate, if the investment in infrastructure projects is growing at a rate of 10% a year, the demand for building construction materials and growth of the related industries would always be on a positive trajectory at a 1.5X to 3X magnitude.

Also, the kind of project determines the demand for the material types,” says Ramesh. The burning question, of course, is will supply be able to keep up with demand. “Supply can be kept up under two circumstances, namely if normal economic conditions prevail, and if the raw materials supply and prices are favourable to the building materials industry.”

According to Frost & Sullivan, both Qatar and the Kingdom of Saudi Arabia have increased their manufacturing activity as a result of increased demand, a trend especially well directed towards building materials in order to help the domestic construction industry in achieving a level of self-sufficiency.

Ramesh says that what needs to be taken into consideration in terms of any future projections is that both countries have ramped up construction activities due to the growth in economic cities and the run-up towards the FIFA World Cup in 2022. “Qatar and the KSA markets are expected to consume close to 50% of the building materials supplied in the GCC region,” says Ramesh.

This has definite implications in terms of both logistics and the phasing of projects going forward. Ramesh defines the availability of financial investment, skilled labour for construction, building construction materials, construction equipment, technological and managerial workforce as the sequential key factors (SKFs) determining the phased execution of future projects.

“A drop in any one of the SFKs may result in hindrances for execution of the project in question. However, balancing the SKFs would help the companies to complete the projects concerned in the stipulated timeframe.

Also, ensuring a low supply-demand gap of the SKFs and risk-mitigating mechanisms for the same would reinforce the quick turnaround time for construction and infrastructure companies,” says Ramesh.

Another implication of this scenario is that construction and infrastructure companies are increasingly likely to work together on future projects in order to mitigate supply and logistical challenges.

“Challenges such as a lack of skilled labour, as well as a lack of technical and managerial proficiency, will force the GCC construction companies to leverage on close tie-ups or joint execution for major construction and infrastructure projects,” predicts Ramesh.

Joint execution would ideally not be restricted to the construction sector. In the execution of infrastructure projects, for example, joint execution will result in deriving the best synergies of the partnering companies.

Prominent business groups such as Tatas, Essar, L&T and Punj Lloyd have significant partnerships or joint ventures with GCC companies such as Al-Tawleed Energy and Power Company, Qatar Steel, Dubal, and Qatar Solar Technologies.

Any potential supply constraints are likely to have a major impact on materials prices and consequently supply-and-demand going forward.

“The construction and building materials markets in the GCC region are highly dynamic. The recent fall in the prices of construction materials in Qatar is one of the best examples of volatile prices,” notes Ramesh.

“However, the market is slowly gaining momentum. The price movement varies from country to country depending on the supply and demand in respective countries.”

Of particular concern is the price of steel, particularly as the region is heavily reliant on imports from such dominant players as China, India and Turkey. According to Frost & Sullivan, the scenario of the steel market in the GCC region is changing. The region, along with other Middle East countries, is expected to produce 35% to 40% of the world’s total steel production by 2015.

“The prime driver of this phenomenon is the realistic infrastructure investment plans of the governments of the GCC nations, the availability of inexpensive energy and skilled labour (expatriates from India for operational roles and from Europe for managerial roles) at low cost to support the manufacturing of steel products,” explains Ramesh.

The annual demand for steel products in the GCC region stands at over 40m tons, and is expected to grow at 5% to 6% over the next five years, according to Frost & Sullivan. There are 67 steel plants in the Middle Eastern region with an investment valued at $2.8bn.

The steel industry in the GCC region has attracted major investment in order to aid its future growth. Increasing demand and strong competition, together with the increasing cost of raw materials and labour, will lead to an increase in the steel price by 5% to 7% in the medium-term.

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