Viewpoint: GCC construction struggling through pandemic

The construction industry in Gulf Co-operation Council (GCC) has suffered greatly this year. The economic shocks of Covid-19 and tumbling oil prices have left demand for construction materials such as rebar weak for most of the year.

Around 550 projects worth over $60bn are known to have been postponed, delayed, or cancelled since March owing to the virus, most of them in Saudi Arabia and the UAE. Just $4.1bn worth of contracts were awarded in the GCC in April, down by 40pc on a year earlier. In the UAE, the construction sector is forecast to contract by 1.9pc this year from a pre-Covid expectation of 4.3pc growth.

This is partly because of operational difficulties associated with Covid-19. UAE construction workers remained on-site during the pandemic, but social distancing measures resulted in a 10-30pc drop in productivity. The expat workers on which the industry heavily relies have also left the region in large numbers. Latest estimates forecast a 10pc peak-to-trough decline in the UAE's overwhelmingly expat population owing to the pandemic. Additionally, firms must face a shrinking market as tumbling oil prices in the middle of the year mean project spending is forecast to fall in all GCC countries.

This has created a hostile environment for contractors. Shareholders of UAE-based construction giant Arabtec Holding voted in September to place the debt-laden company into liquidation after registering a $216mn loss in the first half of 2020. Drake and Scull, another UAE-based construction company, announced in October that it was in the "advanced stages" of financial restructuring talks with banks.

This has left GCC rebar producers struggling with low demand. Rising costs amid strengthening global raw material prices have also put pressure on mills to sell increasingly expensive material in a persistently negative demand environment. The Argus monthly UAE rebar assessment rose by 90 dirham/t ($25/t) to Dh1,950/t ex-works for December delivery as raw materials made further advances in November. Overbuilding leading up to the pandemic has also exacerbated its impact, market participants said. Many remain unsure when rebar demand will recover, while some doubt it will ever return to pre-pandemic levels.

Mills are pessimistic, but most short-term forecasts expect the construction sector to bounce back to growth in the first half of next year. Output is expected to remain below pre-pandemic levels regardless. Government measures aim to boost the flagging sector. Dubai's local authorities authorised a revised set of construction codes in October to cut costs, streamline design processes, and diversify projects. Building fees have also been restructured in the Emirate to attract investment.

It is unclear how effective these measures will be, looking further in the future, but it is unlikely the pandemic will permanently hinder construction in the region. As GCC countries seek to wean their economies off crude oil dependence, the necessity of diversification through state-sponsored mega projects such as Saudi Arabia's "Vision 2030" plan is likely to help the industry rebound from a turbulent 2020.

By Sam Angell