The perfect storm

What can Qatar do to keep up with materials demand?

ANALYSIS, Materials, Doha, Middle east, Qatar

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When it comes to construction, Qatar is buzzing. The promise of the 2022 World Cup and the many other big-ticket construction projects in the region have created a dynamic and growing construction environment.

About $200bn worth of projects have either already started, or are planned in the region, according to an estimate by the Middle East Economic Digest. That totals more than Qatar’s current GDP and about $100,000 for each of its two million inhabitants.

With multi-billions invested in its infrastructure programme, millions of cubic metres of concrete and tonnes of materials will be required for the projects. That’s before you even consider the challenges around recruiting and relocating thousands of foreign workers. The logistical challenges are immense and as a result, Qatar remains the most expensive country across the Middle East, in which to build.

There is no shortage of finance – Qatar is fine on that front – what is needed is the arrival of building materials, at a viable cost, on time and of the correct quality and quantity.

There are numerous surveys out that have projected a supply shortage, and project delays frequently make the news. Issues around importing building materials and the requisite red tape for various approvals, are often given as the reason behind the delays that create bottlenecks and shortages in the supply chain.

The word in the industry is that, in the run up to the World Cup, the highest projected demand would be limestone, gabbro and spoil removal and disposal (SR&D).

A report by Gulf Investment House (GIH) titled ‘GCC Investment Strategy 2014’ said the uptrend in cement demand is attributed to events such as the 2022 FIFA World Cup in Qatar and World Expo 2020 in Dubai, with demand being fuelled in Saudi Arabia, where the country has embarked on an SR250bn housing construction programme.

“Qatar continues to derive its demand from the construction sector, with projects worth $140bn planned for the coming five years, in its preparation for the World Cup,” said the report. Other factors contributing to the rise in cement demand are improving economic performance across the region and strong government expenditure.

The Ministry of Development Planning and Statistics, in conjunction with the Ministry of Business and Trade, anticipated that for the forecast period, 2012 through 2022, limestone would be the category of material with the highest demand, coming in at a hefty 515mn tonnes, followed by gabbro, at 264mn tonnes. Back in 2013, the anticipated peak demand was due between 2014 and 2016 and it looks as though in some areas, it’s happening right on schedule.

In a survey conducted last year — which focused on the future demand of primary building materials and covered all the key developers engaged in mega-projects in Qatar — it was projected that a record demand for primary building materials during the 2014 to 2015 period was expected, with demand for SR&D expected to increase by 169% in 2014, and 13% in 2015. The demand for gabbro showed an increase of 145% in 2014, and 86% in 2015, with the demand for bitumen set to increase by an enormous 139%.

While contractors and suppliers alike are somewhat restrained about commenting on the potential shortfall, there are building material companies that are starting to experience a demand surge, along with potential price hikes.

Ashish Desai, senior production manager, Danube Building Material Company, said that the company has experienced “at least a 25 % increase in demand for building materials over the past year” with specific demand around materials for infrastructure projects.

He commented that, as Qatar has limited suppliers, "it’s a captive market, so the contractors have few options but to pay the prices demanded,” which he foresees increasing by up to 5% within the next six months.

To date however, he said that there has been no issue around supply of materials, quickly adding that this is attributable to “a sound internal procurement process.” He also said that there has been no drop in quality of product supplied.

Sean Kelly, project director for Place Vendome, said that he doesn’t see any potential supply chain issues in Qatar coming down the line during the anticipated construction of the luxury development., due for completion in 2017.

“We have to be cautious around supply lines, as we are in an environment that has construction running at full tilt, and we believe that there will be the inevitable price hikes. However, we don’t see any problem with that, as we have a variety of local suppliers through whom we source some of our materials — and we’ll get our orders in early” he commented.

However, if projections are correct, according to the Public Works Authority (Ashghal), selected projects alone will need an estimated 495mn tonnes of limestone during the 2012 to 2022 period, with a demand for gabbro expected to reach 156mn tonnes during that time.

According Nick Smith, partner at EC Harris, Middle East: “There has been an increase in material demand over the past 12 months, specifically for primary materials used in civil work such as cement, bitumen, aggregated and washed sand. Whilst the demand is increasing, it is still not to the extent that was forecasted by the industry a couple of years ago.

"This is largely owing to the length of time major programmes are taking to complete contractor procurement stages.”

He added that other materials, such as construction fill, have seen a large increase in demand and a shortage in supply, owing to logistics issues: “For example, often a country will have the right materials but at the wrong location, which results in increased time to move large volumes across the country. So whilst the demand for material is increasing, the ‘surge’ has not yet taken place.”

But he cautions: "Unless Qatar implements pre-emptive actions to invest in certain material supply chains, there will be a very high likelihood of material shortages and hyper-inflation.”

He also commented that, unlike almost any other programme in the region, the schemes that are deemed essential for the delivery of the 2022 World Cup have an immovable deadline.

He elaborated: “This means that any delays to contractor awards will not only push the predicted peak of demand further along, but also higher, as the time will reduce as the peak becomes more pronounced.” He added that the impact of this is not anticipated to be the same across all building materials, as the supply situation is very different, depending on the supply source.

“Qatar is planning ahead to mitigate supply issues; for instance, providing a more centralised supply of key materials such as steel rebar, cement and aggregates," he added.

Smith foresees that if the high demand of materials and the barrier of logistics into the country continue, the industry will see a challenge in balancing supply with demand. “Other alternatives could be either forward buying of material or an increase in short-term port capacities,” he mooted.

And while there are quality issues in supplied material, Smith sees that the responsibility of quality construction materials “will lie with the contractor to ensure robust standards and capable supply chains” along with the designers specifying the correct materials.

Mark Rudman, Faithful+Gould country director for Qatar, commented that as the region's construction sector heats up, logistics will start to have a profound effect on the supply chain: "Being a caged market, everything is imported," he said, and added, "While there may not be issues with product quality, there will definitely be challenges with quality of workmanship, coupled with shortages of skilled labour in the region."

With such a vast projected demand for construction materials, market forces expect strong intervention by the government to check any possible hike in the prices.

Nevertheless, Qatari construction companies are forging ahead, regardless of growing criticism about construction-site safety and its controversial system for importing thousands of foreign workers. The view is that, any changes to that model could increase costs or even undercut the country’s aggressive development schedule, analysts say.

So, while the industry generally, is not too forthcoming on comment, the perfect storm may well be brewing on the building materials front. How exactly the construction industry will weather this, only indicators over the next few months will tell. Until then, many are ‘battening down the hatches’ and waiting for the storm to break, while it’s work as usual.

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