Well positioned: The construction sector looks set to benefit from the government’s investment drive

The construction industry is widely expected to be one of the principal beneficiaries of Kuwait’s portfolio of KD30bn ($107.14bn) in large projects first proposed in 2010. With an evident determination by Kuwait’s latest parliament to implement key components of the National Development Plan (NDP), confidence is building within the sector, which is well positioned to leverage its opportunities in 2013.

The scale of immediate opportunities is yet to be determined, however, given the expected slowdown in GDP growth to 1.9% in 2013 from 6.9% in 2012. Government revenues are strongly tied to oil, and this has historically proven to be a major factor in project implementation. Yet the current government is determined to move past three years of delays. With demand skyrocketing, the utilities sector grew 75.2% between 2006 and 2011, from KD335m ($1.19bn) to KD587m ($2.09bn), a compound annual growth rate of 11.9% that outperformed growth in oil and gas. As demand begins to outstrip capacity across almost all sectors, water, electricity, sanitation and transport are at the forefront of the NDP’s first tranche of large projects. These constitute a long-awaited boon for cement, steel and aluminium providers.

MATERIAL BENEFITS: Kuwait’s cement and metal manufacturers are niche players in national construction activity. In 2011 Kuwait exported 8751 tonnes of mineral products (salt, sulphur, earths and stone, plastering materials, lime and cement) and imported 16.9m tonnes. Similarly, in 2011 Kuwait’s export of 753,093 tonnes of base metals was vastly outweighed by 2.24m tonnes in imports. Moreover, although Kuwaiti cement manufacturers have banked positive net earnings, domestic production has remained flat in recent years. Between 2007 and 2011 cement production increased 2.2% from 2.2m tonnes to 2.25m tonnes, while iron and steel production fell 2.5% from 1.18m tonnes to 1.15m tonnes in the same period, according to the US Geological Survey’s 2011 annual mineral review. Cheaper imports from GCC neighbours have played a role in this, as they make for increased competition.

SLOW DEMAND: A flat, albeit profitable, performance over the past five years is indicative of slow demand from the private sector, which historically maintains a small role within the wider economy. Khalifa Al Ghanim, the general manager of Kuwait Portland Cement, which accounts for 35% of the market, told OBG, “Considering the time frame and the growth, the demand for cement has not risen over the past five years. The demand in 2007 was 4.4m tonnes; now is it barely 4m.” Such observations are supported by investment trends. The construction industry has grown 45% in value, from KD534m ($1.9bn) in 2006 to KD775m ($2.27bn) in 2011, according to KIPCO Asset Management Research. However, both the construction and industry sectors received a flat 7% allocation of Kuwaiti banks’ credit portfolios from 2008 to 2011, while 26% was invested in real estate, which has seen the residential and investment segments profit, according to the IMF.

These market trends did not forestall capacity upgrades in 2011 for two of Kuwait’s four cement producers, the Kuwait Cement Company (KCC) and ACICO Industries. KCC installed a second production line at its plant near Shuaiba Port that will double its production capacity by 8500 tonnes per day, and ACICO installed a new cement plant, also at Shuaiba, that is slated to bring capacity to around 1m tonnes per year, although this is largely for its own use.

FOREIGN COMPETITION: The two companies remain Kuwait’s pre-eminent domestic producers, with combined capacity to produce 2.8m tonnes of clinker and 3.2m tonnes of Gray Portland cement. The Hilal Cement Company and Kuwait Portland Cement also import bulk cement products. In parallel, Kuwait retains the capacity to produce 1.5m tonnes of steel, 1.05m tonnes of rolled steel and 185,000 tonnes of pipes as of 2011. Despite its domestic production capacity and cheap power, the country’s cement and steel manufacturers have found themselves outpriced in the construction industry’s current environment by both regional and Asian competitors that have gained a strong market edge with cheaper commodities.

In cement imports, this has been led by the UAE, Saudi Arabia and Iran, according to statistics provided by the Central Statistics Bureau. Industry executives speaking with OBG have reported positive export growth as a counterweight to domestic challenges, but approval of NDP projects in 2013 will likely refocus attention inward. Delays in the implementation of the NDP have been disruptive to business planning, but companies supplying the construction industry have factored in the element of uncertainty, and construction material prices have reportedly remained stable as a result. Price increases are expected once NDP projects break ground and demand increases.

TENDER ALLOCATIONS: The construction industry’s playing field is expected to change in the near term as reforms to the allocation of project contracts by the Ministry of Public Works and Central Tenders Committee (CTC) are implemented. Pre-qualification terms have typically favoured Kuwait’s major construction firms, which remain the dominant parties in all bids. While this has been to the disadvantage of smaller firms, technocrats are beginning to effect changes in the system. This includes a shift toward separate financial and technical tenders, which would be a departure from the established practice of releasing single, lump-sum project contracts. This will give more weight to value and quality, in line with frameworks already employed by Kuwait’s neighbours.

Such reforms are expected to benefit all firms in the marketplace. The CTC’s preference for selecting the cheapest bids, irrespective of other considerations, has in some instances resulted in project delays as agreements are renegotiated or contractors drop out once the project’s true scale is realised. This preference has also elicited renewed calls for the government to protect Kuwaiti firms, which have been undercut by foreign companies seeking market access. However, with a plethora of large international firms already well invested locally, including Halcrow, Parsons, Mitsui, Hyundai and Samsung, Kuwait continues to pursue an open market environment.

PRIVATE REDOUBT: Ahead of the full implementation of the NDP, industry continues to consider alternatives. Real estate demand may yet provide such an opportunity, having demonstrated a 16% hike in property sales during 2012, according to the Kuwait National Bank. Indicative of a blossoming recovery from 2008, the sector’s prospects received a further boost in January 2013 when the government pledged to build 174,000 houses by 2020, up from the 139,000 housing units previously promised by 2017.

Demand is high. There are currently 100,000 applications pending and 8000 new applications added each year, according to the Ministry of Housing. Waiting periods have increased to 15 years, and project completion time frames have risen from four to five years. The ministry has also announced plans to build three new cities each with a capacity of 108,000 units – one close to the border with Saudi Arabia and the other two near the border with Iraq – in addition to several new residential areas with around 66,000 units. While no budget has yet been revealed, the supporting infrastructure alone is estimated to cost around $5bn. January 2013 also brought news of a windfall for construction as the Ministry of Commerce and Industry announced a KD95m ($339.3m) loan package through the Kuwait Credit and Savings Bank for buying locally made construction materials.

Equivalent to around 45 tonnes of rebar, 4500 cement bags, 80 cu metres of bricks and 522 sq metres of limestone bricks for each construction loan beneficiary, the initiative represents a substantial stimulus for the industry. Indeed, shifting public financing from government directly to the consumer may provide the necessary breakthrough on Kuwait’s considerable housing bottlenecks.

GOLDEN FUTURE: Ostensibly, 2013 is the construction industry’s year of opportunity, but the scale of opportunity is not yet clear. While Kuwait’s steel and cement manufacturers are critical components of proposed projects, their attention remains focussed on the real estate and export markets at this juncture. Latent production capacity is indicative of the industry’s ability to match a large part of the NDP’s expected needs. However, without tangible progress in its implementation, domestic producers will likely remain outpriced by foreign manufacturers and will look toward another year of outward expansion.

Nominal GDP by economic activity, 2006-11