Hard assets: Region relies on cement

The huge cost increases, which have tripled or quadrupled expenditure projections for some major industrial construction projects in the region, are partly related to international price pressures stemming from demand in China and elsewhere. But they are also linked to local supply bottlenecks and insufficient production capacities that have led to a region-wide race for building new state of-the-art construction material factories to service the demand.

"Shortage of material is why construction prices have increased dramatically for the last couple years," Elie Kfoury, the managing director for DG Jones' Dubai branch, told Executive. DG Jones is one of the biggest construction cost control and quantity surveyors in the region. "Projects are becoming bigger and bigger--the Middle East has had a big boom in the last two years. Factories weren't expecting this."

Last year, regional business information platform Zawya estimated that ongoing MENA real estate investments totaled $387 billion compared to the regions' combined GDP of $804 billion--a 48% ratio. Supply is at maximum capacity in most Middle Eastern countries, with demand swelling due to population increases and growing foreign direct investments.

As rising energy costs and increasing construction demands strain construction material supply in the Middle East, more local factories are being set up to slash import costs and to stabilize the growing prices incurred from undersupply. Syria opened up its cement sector in 2005 to private investments and granted licenses to private operators, which are expected to begin operations by 2009.

Steel prices have doubled in the GCC since 2003 with transport costs rising as much as 200% in recent years, prompting Oman to step up investments in steel factories to bolster production over the years. The region's largest steel making group, Egypt's Al Ezz Steel, also recently said it is looking at building a $700 million steel mill in Algeria, in addition to significant capacity expansions in Egypt.

But considering that many countries are building their own construction materials factories to service local demands and that exporting these bulky goods is costly and an integral reason why local factories are emerging, who will benefit from an oversupply once construction stops?

Challenge for the Levant
For the Levant, the challenge is to keep Gulf cement and other materials out of their market as GCC factories receive subsidized energy, feeding lower production costs.

"The imbalance between supply and demand should not last much longer as many new cement plants are emerging in Jordan and the GCC. Within 18 months, I think there'll be an oversupply in the region independently if the construction boom stays strong or weaken," Pierre Doumet, CEO of Cimenterie Nationale (CN) cement company in Lebanon, told Executive. "Then, I think, the regional cement prices will decrease because there will be an oversupply."

Apart from capitalizing on the short term opportunity that undersupply currently presents, the long term gain for CN and other companies is securing future competitiveness.

"We are using the boom years we have now to renew our equipment and be ready for the bad years, that's why we are [expanding] our site. We are building a state of-art site and reducing operational costs--especially energy--to withstand the lean years," Doumet says.

CN is the second-largest cement producer in Lebanon, but will soon be the first, Doumet says, with factory expansion and energy-efficient plans near completion.

Energy prices for production are the main concern of building materials manufacturers. Other than cutting down on this cost via alternative energy sources, quality is the only other advantage.

"If we want to be competitive across the Gulf and Middle East, it's not easy anymore. Gulf prices are cheaper but the quality is not good," said an official with a Lebanese ceramic company who wished to remain anonymous. "What we are trying to do is improve quality and design and convert to cheaper energy to keep Gulf products out of our market."

To remain competitive, companies are becoming creative in the energy department. Jordan Cement Factories (JCF) is looking into shale oil production as a way to trim down operational costs. Shale oil is a sedimentary rock with enough organic minerals that when distilled, yield oil for energy uses. JCF hopes to start tapping into its shale reserves by the end of 2007, once it receives a permit from the Ministry of Environment.