The UAE’s  Ministry of Economy has set the price ceiling for cement at Dh295 per tonne and Dh17-18 per 50kg in June 2007 as escalating costs of construction materials — mostly steel and cement — threatened to impact the booming construction sector.

Undue advantage

While most cement factories in the UAE abide by the official price cap, some leading building materials traders take undue advantage of the supply shortfall to charge up to Dh29 per 50-kilo bag for Ordinary Portland Cement through mostly under-the-table transactions for which no proper cash bills are issued. However, some industry sources said certain cement suppliers are demanding more than Dh400 per tonne as a result of a steep rise in clinker, diesel and manufacturing costs.

In a move to tackle the worsening supply crisis, 41 cement manufacturers and distributors yesterday met in Abu Dhabi to reiterate their commitment with the Ministry of Economy to sell  cement at Dh18 per bag at stores within the city limits. The cement industry has also committed to increase its daily production from 150,000 bags to 250,000.

“Since the persisting supply crunch is very critical, we have to buy on the black market. If we ask for cash bills, either they (traders) refuse to issue one or scribble other materials instead of cement so that they will not be held responsible for violating the price ceiling fixed by the government.

Stringent measures

“This flagrant over-charging amounts to black marketing. We hope authorities will implement more stringent measures to check such price ceiling violations and rampant hoarding by middlemen,” a spokesman of a leading construction company said.

“It is very unfortunate that despite the best efforts by the authorities and the full cooperation extended by cement manufacturers, such acts of exploitation by hoarders continue unabated in a country where construction industry is a key driver of growth,” said the head of a Dubai-based contracting company.

While most cement companies in the UAE continue to observe the price cap, the long-waiting and quota restrictions due to short supply make it risky for contracting companies to directly source the commodity from factories.

Mahendra Patel, Chairman of Building Materials Trading Group, said the Dubai-based trade body is looking into the issue and see how it can help stop such indiscriminate increases in prices of cement and other building materials that have driven up construction costs by an average of 55 to 60 per cent.

“However, it is not always possible to effectively implement the price cap as cement, like steel and timber, is mostly imported. Escalating raw material costs and shipping rates are also marginalising traders' profits,” he said.

A cement retailer said since he is getting the supply from a middleman-stockist at Dh27 per bag, he cannot sell it for less than Dh28.50 per bag. “This situation has been brought about by a huge demand-supply mismatch. There is a long queue of delivery trucks at most factories, and after a day-long wait cement retailers end up getting a small quota that is insufficient to meet demands from construction companies.

“As there is acute shortage in the regulated market, we have to ensure availability of the product from parallel, unofficial markets,” he said.

Cement prices, which remained for several years at Dh11-12 per bag, skyrocketed to Dh32 couple of years ago prompting intervention by authorities to cap the prices. Stoking the price escalation was rising transport costs which went up by more than 60-70 per cent as a result of fuel price surge.

Analysts have predic ted a melt-down in the inflated cement prices in the UAE  with additional capacities coming on stream through 2009. Over the next two years, as existing cement producers add capacity and new players set up green-field plants, UAE’s total capacity is expected to touch almost 41 million tonnes to far exceed demand and resulting in oversupply.

Dubai’s cement imports shot up 73.6 per cent, or 1.26 million tonnes to 2.96 million tonnes in 2007, according to the Dubai World Statistics Department. Dubai imported 1.70 million tonnes of cement in 2006.

In 2007,  UAE’s total cement production was estimated at 13.2 million tonnes and consumption at 18.2 million tonnes. This gap in the market had been covered through imports which grew by more than 47 per cent in 2007 from Dh505 million in 2006 to Dh743 million in 2007.

According to Dubai Chamber of Commerce and Industry statistics, despite government's attempts in July 2007 to cap cement prices at Dh295 per tonne, average price in Dubai increased by more than 50 per cent by March 2008.

With construction activities gathering added momentum, cement consumption in the UAE, growing at a compounded annual growth rate of 24 per cent during past four years, is expected  to touch 35 million tonnes while output rises to 41 million tonnes by 2011, says Global Investment House in its latest report.