The construction sector continues to witness an increase in the value of awarded contracts, says report by the U.S.-Saudi Business Council
The construction sector continues to witness an increase in the value of awarded contracts as it grew to SAR19.2 billion ($5.1 billion) during Q1’21, reflecting a 20 percent increase compared to last quarter, according to a report by the U.S.-Saudi Business Council.
On an annual basis, the value of awarded contracts lagged by 58 percent compared to Q1’20. The economic backdrop during the first quarter was largely influenced by the Kingdom’s decision to cut oil production last February in an effort to buoy global oil markets, which led to an oil GDP decline of 12 percent and total GDP to also decline by 3.3 percent on an annual basis. Conversely, non-oil GDP witnessed a 3.3 percent increase during the same period and a grew by 4 percent compared to last quarter. The reemergence of consumer spending and bank lending to the construction sector coupled with continued spending on housing projects aided in the Kingdom’s non-oil sector recovery.
USSBC’s Contract Awards Index Performance through Q1 2021
The USSBC Contract Awards Index (CAI) declined to 92.30 points at the end of the first quarter. This follows the ongoing trend that began in Q4’20 as the value of contracts significantly declined as result of halted and cancelled projects stemming from the pandemic. The decline of the CAI below 100 points for two consecutive quarters entails a possible slowdown in executable projects over the next 6 to 18 months. The number and value of executable contracts at the end of 2021 will slowly rebound as the macroeconomic landscape continues to improve. The CAI is expected to pass the 100 point threshold over the next three quarters as low base effects stemming from the considerable decline in contract awards during 2020 will revive the index. Despite the decline in the CAI, construction project awards are increasing compared to last quarter.
The value of awarded contracts during Q1’21 was led by the power sector, which accounted for SAR5.2
billion ($1.4 billion) or 27 percent of all contracts. The power sector had 22 awarded projects that were dominated by the Saudi Electricity Company (SEC) while the Renewable Energy Project Development Office (REPDO) accounted for the highest value of contracts.
The real estate sector garnered approximately SAR4.3 billion (1.1 billion) or 22 percent worth of awarded contracts as residential projects accounted for a majority of the share. The real estate sector had 13 awarded contracts that were led by the Ministry of Housing in residential and by The Red Sea Development Company in hospitality. The residential real estate segment continues to witness sizeable projects on the back of increasing Saudi home ownership to 70 percent by 2030. The oil & gas sector captured the third largest share of awarded contracts with SAR3.9 billion ($1 billion) or 20 percent of the total. Saudi Aramco awarded all the projects in the sector as construction work pertained to the Shaybah NGL plant, the South Ghawar field, and Marjan field.
Overview of awarded contracts by region during Q1 2021
The Eastern Province accounted for the highest share of awarded contracts during Q1’21 with SAR6.6 billion ($1.8 billion) or 34 percent of the total. The oil and gas sector accounted for SAR3.9 billion ($1 billion) or 58 percent of awarded contracts in the Eastern Province, while the real estate sector accounted for SAR1.6 billion ($417 million) or 24 percent.
In the Makkah region, the power sector accounted for the highest share of awarded contracts as it witnessed SAR2 billion ($524 million) or 58 percent of the total. The real estate and transportation sectors were awarded similar values of SAR540 million ($144 million) and SAR533 million ($142 million), respectively. Each of those sectors accounted for 16 percent of the total share in the Makkah region. The water and transportation sectors claimed the remaining shares of awarded contracts.
The Riyadh region accounted for SAR2.7 billion ($708 million) or 14 percent of the total. The transportation sector registered the highest value of awarded contracts with SAR850 million ($227 million) or 32 percent. The real estate sector accounted for SAR555 million ($148 million) or 21 percent of the total. The power sector captured the third largest share in the Riyadh region with SAR489 million ($130 million) or 18 percent of the total.
Breakdown of awarded contracts across top performing sectors
The power sector surged during Q1’21 as the total value of awarded contracts reached SAR5.2 billion ($1.4 billion) or 27 percent of the total. This marks the highest value of awarded contracts in the power sector since the fourth quarter of 2015, when it tallied SAR11.3 billion ($3 billion). Furthermore, the power sector grew by SAR1.6 billion ($423 million) or 44 percent q-o-q, and by SAR2.6 billion ($690 million) or 100 percent y-o-y.
The real estate sector continued to witness sizeable investments during Q1’21 as residential developments led by the Ministry of Housing remain a key priority. The SAR4.3 billion ($1.1 billion) in awarded contracts garnered 22 percent of the total share. Despite the real estate sector decreasing by SAR1.6 billion ($427 million) or 27 percent q-o-q, it substantially grew by SAR2.6 billion ($697 million) or 148 percent y-o-y. The residential segment accounted for SAR2.9 billion or 67 percent of the real estate sector’s value of awarded contracts while the hospitality segment accounted for a distant second with SAR825 million ($220 million) or 19 percent during Q1’21.
Oil & Gas
Despite a steep decline in the number of projects since the onset of the pandemic, the oil & gas sector consistently maintains its position as a top awarder of contracts by value. The SAR3.9 billion ($1 billion) in awarded contracts during Q1’21 grew by SAR3.1 billion ($840 million) or 442 percent q-o-q. However, the value this quarter significantly lags compared to the same period last year is at decreased by SAR6.9 billion ($1.8 billion) or 64 percent y-o-y. Saudi Aramco’s decision to decrease their capital expenditures for 2021 from $45 billion to $35 billion in light of the pandemic and lower oil revenues during 2020 will dictate the pace of awarded contracts during the year. Despite the decline in Saudi Aramco’s capital expenditures, the oil & gas sector is expected to garner a larger share of awarded contracts compared to 2020.
Contract Awards Outlook
“The Saudi construction sector is in the midst of a rebound as the value of awarded contracts climbs out of a difficult 2020 that witnessed the lowest values in over a decade. On a quarterly basis, the value of awarded contracts has steadily increased from the low point of SAR7.4 billion ($2 billion) during Q2’20 to SAR19.2 billion ($5.1 billion) in Q1’21. Looking ahead, the macroeconomic environment continues to improve across a number of categories that should support stronger investments for the public and private sectors,” said Albara’a Alwazir, Director of Economic Research at the U.S.-Saudi Business Council.
The non-oil sector GDP increased during Q1’21 by 4 percent despite a sharp decline in oil sector GDP. Signs that private sector confidence is growing in the Kingdom is illustrated in the Purchasing Managers’ Index (PMI), which grew to 56.1 points in May from 55.2 points in April 2021. The increase in the PMI was driven by private sector output, which grew at the fastest rate since December 2017. Improved market conditions also led to the rise in customer orders as new orders climbed to its fastest rate in four months. Furthermore, bank claims on the private sector and public sectors continue to expand as investments into the economy ramp up. Bank claims on the private sector grew by SAR237 billion ($63 billion) y-o-y in April 2021, marking a 14 percent increase, while bank claims on the public sector grew by SAR55 billion ($15 billion), a 12 percent rise.
Despite lower base effects contributing to a spike in spending stemming from the lockdown measures in 2020, consumer spending exhibited extraordinary growth as the most recent data reflects a 142 percent increase y-o-y in point of sales (POS) transactions as of April 2021. Cash withdrawals were up by 27 percent y-o-y as the opening of the economy led to a surge in spending across all sectors.
An important indicator that construction activity is rising is the increase in cement sales. Cement sales as of May 2021 indicate that the 17 Saudi cement producers witnessed a 65 percent increase y-o-y to 3.5 million tons. The surge was driven by domestic sales, which grew by 71 percent during the same period. Furthermore, clinker inventories decreased by 22 percent y-o-y to 33 million tons despite a production increase of 4.6 million tons or 7 percent.
The increase in investments and construction activities by the private sector has lessened the burden on the government to fulfill the Kingdom’s development plans. This has allowed the Kingdom to decrease its capital expenditures budget especially during a period of lower oil revenues. While the private sector has taken an expanded role, the government’s allocation of SAR101 billion ($27 billion) for capital expenditures in 2021 will play a vital role in the development of social and physical infrastructure projects. However, the government spent only 15 percent of its budgeted capital expenditures during the first quarter of 2021. With 85 percent of capital expenditure remaining, the government will accelerate its infrastructure investments throughout the next three quarters of 2021.
Looking ahead into the next quarter, a number of contracts are expected to be awarded that will continue the momentum in the construction sector. Two mega-projects are expected to be awarded in renewable energy during the second quarter. ACWA power will award the Sudair 1,500 MW Solar PV project. REPDO will also continue awarding projects under Round 2 Category B pertaining to the 600 MW Alfaisalia Power Plant. Another notable project is the Advanced Petrochemical Company’s Propane dehydrogenation & Polypropylene complex, which is expected to award two sizeable contracts.