Shooting through the roof - price hike of rods destabilising the real estate and housing industry and its consumers in Bangladesh

Shooting through the roof

Saad Hammadi and Faizul Khan Tanim discover how the steel industry has artificially hiked the price of rods destabilising the real estate and housing industry and its consumers as a result

photo by Al-Emrun Garjon

A year ago, an apartment in Mirpur or Uttara would cost Tk 2,500 per squarefeet at a minimum price, today it is Tk. 3,500. An abrupt rise in prices of construction materials has left many potential buyers of flats, deprived. As Mukarram Husain Khan, former president of Real Estate and Housing Association of Bangladesh (Rehab) points out, ‘our buyers have become product shy because of their budget failure to afford their desired apartments.’

A New Age investigation this week reveals that the unjustifiable price hike of mild steel rods as one of the major reasons behind the rising price of apartments across the country. A number of construction firms have halted their work in progress in anticipation of a decline in prices of rods.

However, this has led many real estate companies to breach their commitment to clients, say Rehab members.

In the last quarter of 2006 when the market price for a kilogramme of 40-grade (descrived for thinness) mild steel (MS) iron rod was around Tk 40, the government issued tenders for construction setting the price of rods at a little over Tk 52 to construction firms.

Within the excess of Tk 12, a construction firm earned its revenue along with labour, tax and subsidiary costs. However, before the construction firms could initiate their tendered projects, two months later the prices increased again.

A year later, the price has almost doubled outright as the prices within this span have been revised at least nine times. At this, the construction firms failed to cope with the price hike in the construction sector for almost all construction materials.

‘Since then, I am running on a loss of more than Tk 20 lakh on at least six projects that I was issued tenders for,’ says Rokib Mostafa, proprietor of a Jessore-based construction firm Sonex International.

An uncertainty looms over the construction sector at the government’s failure to regulate the market prices for rods.

Not only that some of the construction firms have had to wind up their businesses during the period but Rokib says, most are running on losses over 60 per cent.

The present circumstance of rising prices and government’s failure to intervene and bring it down has put the market to a standstill.

‘We have already bought MS rods at higher prices and if it is brought down now, we will suffer greatly,’ refutes Mizanur Rahman Babul, president of Bangladesh Steel Mill Owners Association.

Abu Taher, secretary, and Mohammad Nasirullah, general secretary of the English Road Iron and Steel Merchants Association echo the same sentiment, stating that if a price ceiling forces them to sell the steel below their purchase price it will create discord between them and their buyers.

Although price of rod in the middle of May declined by Tk 1,500 per tonne (from Tk. 73,000 to Tk. 71,500), the Trading Corporation of Bangladesh (TCB) this past week has charted an increment to the rod prices once again, by the same amount.

The prices of rods that showed a decline for a scant period has increased once again, regrets Mukarram, who is also the managing director of CapitaLand Development. ‘In fact we are not getting our required steel even after paying in advance. The steel owners are not releasing their products.’

Sources in the construction sector reveal that the current market price of Tk 72,000 and above for a tonne of 60-grade MS rod —the best quality for building construction— is overpriced by Tk 12,000 as it can easily be sold for Tk 60,000.

But Mohammed Mohsin, an executive member of Bangladesh Ship Breakers Association and managing director of Rahim Steel Mills has a different opinion. ‘The prices should be at Tk 80,000 per tonne by now. The cost of production has increased.’

This however, is opposed by real estate owners. ‘Our production cost should be less than our neighbours like India and China,’ Mukarram opines reasoning, ‘Our cost of energy is much cheaper than our neighbouring countries. Our ship breaking and labour cost is cheaper. In many countries they do not allow ship breaking for environmental reasons. In our country the environmental rules are very lax.’

The commerce ministry in its meeting on April 17 said that between November 2007 and February this year, a total of 12 ships were imported by Bangladesh Ship Breakers Association at Tk 36,900 per tonne.

However, in March alone the ship breakers association imported 19 ships at approximately Tk 42,000 per tonne.

The stock in trade for the 31 ships imported in five months does not finish all at once, say Rehab members. It takes at least six months to one year to complete the sale of raw materials from each of those ships.

If that is the actual cost, the ship breakers association can raise the market price by another Tk 20,000 per tonne to meet their duties, expenses and make profit, the ministry’s meeting was informed. The total market price therefore should not exceed Tk. 60,000.

The duty accounts for 10 per cent on ships and ship scraps.

With the existing stock in trade, the price for rods under no circumstances should increase in the local market irrespective of increments in world market price.

The ships purchased in March should facilitate the steel market for at least until November at a much lower price, Mukarram points out.

‘There is no justification for the steep rise in steel prices in the local market right at this moment.’

Meanwhile, the sharp rise on prices of construction materials has not only troubled the construction sector alone but has compounded into a national crisis as the cost of housing and apartments have went beyond the affordability of the people at large.

Square foot prices have gone high irrespective of the areas, say real estate firms. An inquiry at different real state firms reveal that square foot price in Dhanmondi area has increased to Tk 6,000 to Tk 7,000 from Tk 4,500 to Tk 5,000 in 2006. In Gulshan the prices have gone up to Tk 7,000 from Tk 5,000 two years ago.

The construction cost which has increased by 40 per cent in last one year however, has not been fully imposed on the prices of apartments, warns Malik Hafizul Islam, managing director of City Technology Limited and a member of Rehab.

‘A number of real estate firms have halted their construction work on sites waiting for a decline in the cost of materials,’ he says. However, in this unstable market situation, Malik fears that the prices are unlikely to come down within a short time. Land owners and apartment buyers are victims of an indefinite delay on delivery as real estate owners hold back progress to construction in the face of abnormal price hike.

According to the Trading Corporation of Bangladesh, – monitor for the market prices of MS rod– the 60-grade is retailed between Tk 71,000 to Tk 72,500 per tonne and 40grade at Tk 67,000 to Tk 70,000 as of May 27. The 60-grade rod in January last year was available at a maximum price of Tk 40,000 while the 40-grade was Tk 37,000.

A year and a half later the rod prices show an increase by 80 to 90 per cent.

Sources in the Bangladesh Re-rolling Mills Association, however, claim that this is due to an increase in import costs of raw materials and scrap iron, and rising international prices.

‘Almost 30 per cent of the cost of construction of a building actually goes behind the cost of MS rods. This is a huge blow for the construction sector,’ says Tanveerul Haque Probal, an engineer and president of REHAB, ‘Any severe problem in this sector therefore has a direct impact on the employment of 25 lakh day labourers, masons, carpenters, other workers associated with this field and almost one crore of their family members.’

‘A [fair] price of 60-grade MS rod should be Tk 60,000. The additional Tk 12,000 and above are definitely the result of an artificial crisis made by a syndicate.’

‘Real estate is the largest sector which uses the highest number of country’s unskilled labour force. For example, the villagers who migrate to Dhaka can take up any work like breaking bricks, putting distemper (paint) on buildings, laying foundations and dumping soil. Something alarming as this would definitely harm the sector which contributes almost 20 per cent to the country’s GDP,’ continues Tanveerul, providing a grim assessment of the danger of rising costs.

Rehab sources point out that, in addition to these problems, the price hike might aggravate Dhaka’s prevailing accommodation problem and rent prices will increase drastically. Industries dependent on or associated with the construction sector, like banking, advertising, sanitation, paint and others could face serious consequences.

The syndicate within the ship breakers’ association has to be broken, says Malik if the rod market has to calm down. The government must withdraw the ship breaking association’s exclusive right for importing mild steel rods and open the market for all, say real estate firms.

The association members however deny that a syndicate operates within the ship breakers association.

The price of raw materials for rod has increased due to global price increment, says Zafar Alam, chairman of the advisory committee of Bangladesh Ship Breakers Association, denying the association’s involvement in raising the price artificially.

The price of melted scrap that is used for producing 60-grade rod has increased by 87 per cent between March 2007 and April 2008, says Mohammed Mohsin. ‘The price of iron ore that is controlled by India, Australia and Brazil has increased by 250 per cent. Coal, another component used for producing steel is controlled by China and it has raised the price by 200 per cent.’

The commerce ministry in April formed a probe committee to determine why the price of MS rod keeps increasing. One committee member says, ‘we submitted the report to the commerce ministry and if the suggestions made in our report are followed, then the syndicate is likely to be broken’.

‘The prices of melted scrap and ship scrap —raw materials for MS rod— have gone up in the international market, but the hike should not affect the local market before six months to one year because it takes that amount of time to process them into finished materials,’ says a member of the probe committee.

The syndicate is accused of withholding scrap supplies to artificially raise prices and misleading officials about the prices at which they purchased the scrap. ‘This syndicate is saying that they imported melted scrap with prices between $670 and $700 [per tonne] but that is not true. The scrap was priced around $400 to $450 six months back when they bought it.’

Scrap ships that were bought at earlier prices have been on sale over the period, Zafar says, right from when the ships’ cutting began. The stocks are on the verge of ending and therefore, the prices are feared to increase further. New Age however learnt that the association’s latest consignment of 31 ships that arrived between November 2007 and March this year at a cost of between Tk 36,900 and Tk 42,000 per tonne should continue to sell at a much lower price at least until November.

The probe committee member recommended that Tk 900 tax per tonne of scrap should be declared; there should be a flat tax of Tk 1500 per tonne of rod imported to make it easier for any business to import rods without conditions and reduce the dependence on ships. The purchase of ships for breaking should be unrestricted on which the navy and customs have to provide a clearance; and the district commissioner (DC) should restructure and refurbish the ship-making yard to allow new businesses to operate.

‘Under no circumstances our price should be higher or the same as that of our neighbour,’ says Mukarram. ‘Our neighbours’ economy is growing at a very fast speed. Their consumption is very high, and they can get away by charging more because the economy is growing. The economy has eight to ten per cent growth every year.’

http://www.newagebd.com/2008/may/30/may30/xtra_cover.html