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Jordan: Cementing the Future

Jordan's burgeoning construction and real estate sector has recently been dogged by volatile local cement prices, and yet increased domestic oil prices may now have unexpected benefits in solving this problem.

Secretary General of the Ministry of Industry and Trade (MIT) Mountaser Akleh recently stated that cement prices would stabilise in April as the government went ahead with its strategy to end oil subsidies by March 2007. A further 25% price increase is expected to come into force at the beginning of next month.

The pace of construction in Jordan has been steadily increasing over the last five years and shows no sign of abating. With only two domestic cement factories, and essential maintenance work affecting their supply recently, prices have rocketed over the last year to JD125 ($176.43) per tonne compared to JD74 ($104.45) at the same time last year.

The imminent rise in fuel costs has apparently prompted some players involved in the sector to hoard cement in anticipation of being able to make good profits once the price rise kicks in.

On Tuesday, in an attempt to alleviate the situation, the MIT made provision for Jordan Cement Factories Company (JCFC) to import cement from Egypt.

Construction materials have been in short supply across the wider region and in keeping with practice in many other countries, the Jordanian government does not allow JCFC to export cement unless the domestic supply is satisfied. In the past the company was accused by some of exporting at cheaper prices and undercutting the domestic market.

In 1998, JCFC was one of the first flagship Jordanian institutions to be privatised when the French giant Lefarge bought a 33% stake. This was then increased to become the major shareholding, at 48.1%, in 2002.

The reason for the high prices is primarily due to demand outstripping supply and the increasing cost of fuelling the two plants. Last year, JCFC announced its intention to use pet coke to fuel the plants, in a bid to reduce production costs.

Jordan Construction Contracting Association President Yousef Qurneh claimed late in 2005 that Jordan's production costs were much higher than competitors elsewhere, but this was refuted by JCFC.

In a move which many saw as political as opposed to industry sympathetic, the government refused JCFC's proposal on environmental grounds. While gas, pet coke, coal and waste are all used globally as fuel for cement production, scientists appear divided as to the environmental impact of pet coke.

Subsequently JCFC's managing director, Rasheed Ben Yakhlouf, announced that Experiments are being carried out in the Rashadiyah factory to assess the feasibility of using oil shale there. If it proves to be a viable alternative, it will come into use by the middle of the year.

Either way, JCFC plans to increase production this year to 5.5m tonnes in an attempt to meet demand.

In the meantime however, contractors who are unable to finish projects on time are losing out. Penalty clauses are common if contractual deadline obligations are not met. The government's relaxation of import restrictions on cement - whilst welcome - will smack of too little too late, with prices at record highs. Although the promise that price hikes are going to stabilise prices seems perverse, it will benefit the sector in the longer term.

With international oil prices driving liquidity in the Gulf, broader region investors are looking further afield than the hot and saturated Gulf markets. Historically, Arab investors have favoured close-to-home real estate above less tangible investments - perhaps a reflection of developing attitudes.

Conscious of the opportunity for considerable growth margins elsewhere, these investors are becoming more adventurous and Jordan is set to benefit. In the post 9/11 era, many Arab investors have chosen to avoid the US and to a lesser degree European markets.

There are numerous projects in both the Amman and Aqaba areas in residential, commercial and industrial property development. Residential property demands have never been higher, as Gulf Arabs look for holiday apartments and villas and the increasingly affluent Jordanians aspire upwards.

The Iraqi factor should not be underestimated either, with figures ranging from 200,000 to 500,000 Iraqis now resident in Jordan. Many of these have invested both in houses and commercial property in the interim period before their own country's security situation settles. Additionally, Jordan has become the base camp for many foreign non-governmental organisations (NGOs) and companies operating next door, and this has affected demand too.

The construction sector plummeted in 1997 after the first Gulf War effect subsided, but with a broader range of motivating factors in 2006 and stronger economic fundamentals there seems little chance of a slowdown just yet. That is not to say that the kingdom must not do all it can to prevent a repeat of the terrorist atrocities of last autumn - stability remains key to the notorious fickle overseas investor.

It can only be hoped therefore that the MIT's prediction that the increase in fuel costs will even out cement prices, enabling the construction sector to fully monopolise on the buoyant real estate investment opportunities available in the kingdom.

© Oxford Business Group 2006