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Can UAE construction grow despite weak oil prices?

The UAE’s construction industry expects to grow despite ongoing variations in global crude prices

UAE: The Emirates will grow despite fluctuations in global crude values.
UAE: The Emirates will grow despite fluctuations in global crude values.

Not long after the Holy Month of Ramadan commenced in the region for 2015, HH Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE; and Ruler of Dubai, reviewed the country’s economy. He stated that the UAE’s construction sector reported production worth $81bn (AED295bn) in 2014, up from $42.2bn (AED155bn) in 2006.

In a note released on Saturday, 20 June, 2015, Sheikh Mohammed stated ongoing work on “a large number of infrastructure projects, such as the expansion of national airports totalling $27.2bn (AED100bn); building the Union Rail Network, a project worth $10.9bn (AED40bn); in addition to roads and transport projects, new and improved tourist facilities, electronic infrastructure, real estate, and financial services,” are all expected to support growth expectations for 2015.

A key takeaway from Sheikh Mohammed’s announcement was his assurance regarding the UAE’s commitment to its economic diversification strategy, which, broadly speaking, focuses on expanding the country’s growth opportunities beyond the remit of oil operations.

He explained: “The non-oil sector has experienced positive growth during the first quarter of 2015,” Sheikh Mohammed stated in the note.

“The continuing rise in government spending and investment and the increase in government and private capital, which amounted to $96.1bn (AED353bn) in 2014, also indicate continued strong growth in 2015.

“The decrease in the oil prices has had a positive impact on the growth of many economic sectors in the UAE in 2014, as current-price growth rates for the transport and storage sector amounted to 10%, up from 7.9% in the previous year and the construction sector 6.1%, a substantial rise from 3.4%,” Sheikh Mohammed added in the note.

The last 12 months have witnessed considerable oil price fluctuations due to oversupply and global political conflicts. Oil prices plunged to a low of around $45 per barrel in January 2015, from some $120 per barrel in June 2014, the UK’s International Business Times reported in May 2015.

On 21 June, 2015, a day after Sheikh Mohammed’s announcement, Ireland’s Independent.ie reported Saudi Arabia, the world’s largest oil exporter, has increased output to 10.3m barrels per day (bpd), as a move to contain growth from other global oil producers. The website stated Citigroup’s prediction is that the Kingdom “will push toward its maximum daily capacity, which the bank estimates at about 11m barrels, in the second half of 2015”, leading to further reductions in global oil prices.

The UAE’s construction market has mixed reactions to these estimations. Moafaq Al Gaddah, founder of UAE-based MAG Group, is unperturbed by the oil market’s fluctuations, owing largely to his confidence in the country’s economic fundamentals.

“The UAE has freed its economy from the impact of oil shocks,” Al Gaddah tells Construction Week. “Even I am not concerned about the current oil price.

“We were able to run our business successfully even at a time when oil prices hit a rock bottom in the 1990s. In those days, the UAE economy depended [far] more on oil,” he continues.

“However, oil now represents less than third of the UAE’s GDP, and therefore, the current oil price won’t have a direct effect on our projects and future plans.”

Product market strength and rising tension throughout the Middle East supported global crude oil prices in May and through early June, International Energy Agency (IEA) reported on 11 June, 2015.

“On the one hand, prices appear to have stabilised after staging a partial recovery earlier this year. On the other hand, inventory builds continue amid signs of persistent oversupply,” IEA’s Oil Market Report continued.

Understandably then, sections of the UAE’s construction industry are “cautiously optimistic”, as Steve Caygill, general manager – UAE at Byrne Equipment Rental, puts it.

“The fall in oil prices poses a risk to most businesses, including ourselves,” he said.

“We have seen a reduction in the number of projects starting; however many have started, and we remain quietly optimistic that more are to come.”

These market conditions improve Byrne’s position as a provider of rental equipment and the benefits of hiring, making for commercial flexibility to operating cost in the current scenario when oil prices are low, Caygill tells Construction Week.

Caygill says that Byrne is customising solutions to ensure contractors can minimise the risks and expenses brought on by an oscillating oil market.

“Rather than having to invest in purchasing full-scale camps with the addition of non-core activities for servicing and maintaining them, Byrne is providing customised solutions that are far more cost effective and efficient for companies to execute when fulfilling their commercial obligations,” Caygill explains. “We don’t expect the oil and gas industry to slow down in the near future; historically, the industry has performed in cycles with peak and off peak performance periods.”

A slowdown looks unlikely for now indeed, even if only in the UAE. Sultan Al Mansouri, the UAE’s minister of economy, underscored Sheikh Mohammed’s views a week prior to the Ruler’s announcement, when in a report by local daily The National on 14 June, 2015, he predicted that infrastructure development in the country would power through despite fluctuations in oil prices.

“When it comes to infrastructure such as hospitals, schools, roads, wherever that is needed, we have the capacity to finance it,” he said, according to the daily.

“None of that is going to be affected in the next four to five years simply because the UAE has created a large and substantial reserve over the years”, Al Mansouri added.

According to Sheikh Mohammed’s note, the UAE’s non-oil sector has achieved strong growth rates in GDP – at current prices – of 8.1% in 2014.

The contribution of the non-oil sector to the national economy has reached 68.6% of the constant-price GDP.

“We have put in place all the necessary plans to take that contribution to as high as 80% in 2021,” Dubai’s ruler added in the document.

It is unsurprising then, that construction players active in the UAE and across the rest of the GCC are hopeful about their regional operations, in spite of uncertainty shrouding the oil market.

“The GCC is a key market for us,” David Welch, Europe, Middle East, and Africa (EMEA) president for contracting giant, Bechtel told Construction Week.

“While oil prices continue to fluctuate, we expect to see some impact in the pipeline of future projects. There may be some recalibration in timing for new projects, and a fresh look at priorities for projects among their owners,” Welch added.

“However, while the timing of planned projects may be adjusted, we see governments in the region continuing to invest in infrastructure, particularly where it is of social and developmental importance.”

Not all contractors can be said to have their contingency plans in order, but as a supplier, Caygill isn’t complaining just yet: “The majority of our customers have approached us for price reductions or value-added services, [which means] they do have their contingency plans,” he explained.

“As a supplier, though this is tough, our operational costs do not fall when oil prices fall.

“However, we’ve found that by working closer together, we can come up with solutions and ways of working that can help negate bad market conditions. For example, for a number of projects, we have been able to tailor our existing cabin fleet to provide more cost-effective camps.

“Having a constant dialogue across the supply chain in temperamental market conditions is really important and something we strive to achieve, and [to] pass on such savings to our clients,” Caygill concluded.

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