International Construction regional report on the Middle East
By Helen Wright17 July 2012
The oil exporters of the Middle East are reaping the rewards of a sustained rise in prices, and this in turn is driving construction growth as governments channel the revenues into new projects. In fact, a total potential construction project pipeline worth US$ 172 billion is expected in Gulf Co-operation Council (GCC) countries - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates (UAE) - this year, according to Standard Chartered and there are some clear hot spots emerging.
In terms of projects awarded, Saudi Arabia will remain region's busiest market across all key sectors, from infrastructure to power and gas. Standard Chartered estimated that Saudi Arabia's share of the total pipeline would be around US$ 61 billion this year, with US$ 8.4 billion of projects already awarded since the beginning of the year.
A powerful engine of growth in the region, Saudi government spending on non-oil infrastructure projects is forecast to be +7% higher in 2012 than last year. Infrastructure spending under the Saudi government's 2012 budget allocates US$ 9.4 billion for transport, including projects to expand airports, and the construction of 4000 km of roads.
A clear symbol of the Saudi government's ambition is the
US$ 1.2 billion Kingdom Tower - a 1 km high building that was granted its construction permit in February. The centrepiece and the first construction phase of Kingdom City, a new
5.3 km2, US$ 20 billion urban development scheme in the north of Jeddah, the skyscraper will be the tallest building in the world when it is complete.
Meanwhile, Saudi Arabia also plans to invest more than US$ 12.3 billion to overhaul its three international airports in Riyadh, Jeddah and Dammam by 2020, according to Deloitte's GCC powers of Construction 2012 report, while there is also plenty of activity on Saudi Arabia's railways.
Construction of the 450 km Haramain high speed rail
line that will link the Saudi holy cities of Mecca and Medina to Jeddah is underway - a US$ 6 billion project is scheduled for completion in 2014. Meanwhile, the country's US$ 5.3 billion, 2400 km North-South railway is due to become operational
The government has also announced a US$ 613 million development package for all Saudi Arabia's nine ports, including significant enhancements at the largest Jeddah Islamic Port on the Red Sea.
In addition, 742 new schools and 40 new collages are
to be constructed in the education sector, which has a budget of US$ 45 billion this year, while 17 new hospitals are planned under the US$ 23.1 billion healthcare budget, in addition to
the 130 under construction.
And Saudi Arabia is also expected to be one of the main driving forces behind an expected jump in construction equipment sales in the region this year.
Volvo Construction Equipment vice president for the Middle East sub-region, Jonas Gardetun highlighted the Kingdom as a rising star, commenting, "The construction market is improving rapidly in the Middle East and we see an increase from last year of +30% to +35% in the range of products we compete in. The clear hot spot is Saudi Arabia where the business today is on an all-time high level.
"The main drivers for the increase are infrastructure projects like roads, railways and airport expansions. The huge investments in the oil and gas sector are another driver for the construction market increase," Mr Gardetun said.
Elsewhere, the two largest economies in the UAE - Abu Dhabi and Dubai - are also enjoying strong positive momentum thanks to oil revenues.
There are signs that Abu Dhabi is ready to kick-start many of the projects in its pipeline after years of slow activity. Standard Chartered said a potential US$ 32 billion worth of projects were waiting to be awarded, with almost US$ 11 billion likely to be awarded in the second quarter of the year, followed by
US$ 14 billion in the third quarter.
And Dubai, which has faced significant challenges over the past three years following the bursting of its housing-market bubble, is also now seeing its residential market stabilising. Similarly, Kuwait's real estate sector is showing signs of recovery, and the oil and gas industry is expected to support the funding gap resulting from the government's commitment to major housing and infrastructure programmes, including the four-year US$ 132 billion Kuwait Development Plan, which includes investments in power, water, transport, housing and healthcare.
In Qatar, meanwhile, there are an estimated US$ 30 billion of infrastructure projects expected to be awarded this year, also fuelled by oil revenues, while the organisation of the FIFA World Cup in 2022 is providing another catalyst for growth.
Volvo's Mr Gardetun was also upbeat on construction equipment prospects in Qatar. "Business is recovering and with all the panned big projects, we expect Qatar to be the next booming market," he said.
Oil revenues are also allowing room for higher spending in Oman, where infrastructure investments account for the third largest outlays in the budget. Spending on new projects in 2012 is forecast at US$ 4.2 billion, including at least US$ 2.6 billion on roads.
With all this development potential, it should come as little surprise that Chinese investors are eyeing the hot spots of the Middle East. China is also one of the largest oil destination markets for the region's exporters - a fact that is leading to new development agreements.
In May, China State Construction Engineering Corp (CSCEC) signed an agreement with Abu Dhabi state-owned investment company Aabar that will see it channel US$ 2 billion into real estate projects in the emirate.
The Industrial and Commercial Bank of China (ICBC) will provide the funding, while CSCEC will be the contractor for the project, which includes the construction of hotels, office buildings and high-end residential buildings in Abu Dhabi. In return, Aabar will repay ICBC through the revenue it gets from oil trading.
Volvo's Mr Gardetun also noted a surge in interest from Chinese manufacturers looking to target the region's construction equipment market.
"In general in the Middle East, we see a strong development on the crawler excavators with the biggest demand in the 20 to 25 tonne class. We also see a growing competition from the Chinese manufacturers on wheeled loaders and they are increasing their share of the market," he said.
But, just as hot spots are emerging in the countries of the Middle East benefitting from an oil revenue windfall, elsewhere economies are underperforming and the region's oil importers, including Jordan and Lebanon, face challenges thanks to the higher prices.
Government spending in the region's oil importing nations is being constrained, and economies are less resilient to issues affecting the global economic environment such as the Eurozone crisis, which is also hitting the tourism industry hard.
Rising unemployment and decreasing construction spending look set to dominate in such countries for the next 12 months, and it is clear that a drive to create economies with less dependence on oil is necessary.
Indeed, while the oil exporting countries look set to see a solid year in 2012, they are also vulnerable to fluctuations in oil prices, and could also be hit hard in the event of a slump.
Diversification is underway - Qatar is investing in its liquefied natural gas (LNG) infrastructure, and the sector is growing. The country has been busy finalising long-term contracts in the Middle East and Asian markets since January this year. A preliminary deal with Pakistan signed in February, for instance, could see it export 500 million ft3 (14 m3) per day of LNG to be used to generate 2500 MW of electricity.
But, for the short term at least, oil revenues will continue to drive strong construction growth in the oil producing economies of the Middle East, highlighting the gap between the region's "haves" and its "have nots."