Cementing calm over rising cement prices
The construction industry should not be too worried by shortages of cement.
Richard Feraud, managing director, Quadra Trading, discusses how the construction industry should not be too worried by the recent shortages of cement.
Why have there been such huge rises in the price of cement?
Cement prices have been capped since June last year by the authorities in the UAE.
The cap price is not effective. It is US $80.3 (AED295) per tonne, but nobody is paying that price.
If you look at the economics of importing cement here, it makes no sense.
The cap explains why a lot of raw materials are being imported as it means companies can make their own cement with their own recipe locally.
This is what some of the big groups are doing. They are grinding and blending the clinker with slag.
The pure economics of cement importing would not allow any imports if you had to sell it at the capped price.
Cement prices have been rising dramatically since last year and the freight prices have kept rising as well. This has pushed up importing costs.
Another driver for the cement prices to go up is clearly the cost of energy.
Why has the cap on cement prices in the UAE not worked?
Capping prices by the goodwill of local operators has not worked because market forces are driving prices up.
Also, developers are willing to pay extra premium on cement because otherwise they will pay penalties on the projects they are not delivering on time.
All the drivers are there. The intention of capping prices was to avoid over-heating, but the natural trends in the cement market have pushed prices up.
It seems like some local players have been avoiding the cap by getting two or three trading companies to exclusively market their cement.
So they sign exclusive contracts with developers selling cement at an above cap rate.
What could be done to change the situation?
Cement could be capped at a higher level. But this too may be wishful thinking because market forces are stronger than government interference here.
It's an open economy and although it could be possible to protect an industry, all the prices of raw materials are rising over here.
Some developers and contractors have been signing a number of deals where there are higher penalties than construction costs, so there is no way out.
The authorities also need to facilitate the imports of cements because clearly there are a limited number of players who can import the finished products.
You could start importing cement in bags, although this is a more labour intensive situation.
Maybe port operators need to be pushed to help in this expense.
Is there a black market in cement?
No, I don't think so. But the practices of free market prices beyond the capped price could be called a black market by some people. But I would not say it qualifies as a black market, maybe a kind of grey market instead.
Do you think the cement shortages will slow the GCC's construction boom down?
No, because last year you had the same situation, but then the summer came along.
The heat is very counter-productive for the building industry because there are less working hours and less cement demand.
This will alleviate the pressure on supply. Until November we will see a big slow down.
Then during the winter you have a little more excess in the cement markets because of the freezing temperatures in China, Europe and other countries.
There is no need to panic, it is a natural process. Cement prices are being pushed up everywhere in the markets across the world.
Last year you predicted that there would soon be an excess of cement in the GCC. Do you still believe this?
I think the UAE will have some export capacity in a few years.
There has been a huge surge in demand to more than 20 million tonnes this year.
But we may soon see exports from Saudi Arabia to the UAE, which you have never seen before.
The UAE domestic market will continue to grow but as more and more projects are finished there could soon be the capacity to export some cement.