Saudi Basic Industries Corp (Sabic) said soaring construction costs and labour shortages in the Middle East will probably force some companies to cancel chemical projects and encourage acquisitions.

Costs have surged as much as 70 percent in the last five years and 30 percent in the last three, said Mohamed al-Mady, chief executive officer of the world's largest chemical company by market value.

"The situation is really crazy," Al Mady said at a chemicals conference in Dubai on Wednesday.

"It makes it difficult to achieve acceptable financial targets when capital costs have risen so much ... this will lead to some project delays and probably some cancellations," he said.

Building costs are climbing across the oil-exporting Gulf Arab, driven by a rise in global prices for materials such as steel, and competition among regional contractors working on $2.4 trillion of projects. That is pushing up wages.

Sabic, which employs more than 30,000 people, cancelled an upgrading project at its unit Arabian Petrochemical Co because of higher costs, Al Mady said.

State-owned Saudi Arabia Mining Co said in September a phosphate venture it is developing with Sabic would cost $5.6 billion, 62 percent more than initially estimated.

Norway's Norsk Hydro said in October the price tag on an aluminium smelter it is building with state-owned Qatar Petroleum had risen to $5.6 billion, 86 percent more than first estimated.

Costs are becoming so prohibitive that "people may have to go out and acquire a company" as a more competitive way of expanding, said Al Mady, whose Sabic this year bought the plastics unit of General Electric Co for $11.6 billion, the biggest foreign acquisition by a Middle East company.

Al Mady declined to be more specific about his acquisition plans. "We are always evaluating opportunities," he said.

The company, which the Saudi government set up in 1978 to help the world's largest oil exporter diversify its economy, is also resisting employee pressure to raise salaries to offset domestic inflation by offering alternative benefits such as training programmes and foreign postings.

Companies in the Gulf that give in completely to demands for higher salaries risk having to make redundancies in any downturn, Mady said.

"When the cycle goes down, companies will be left with having a heavy burden of cost that they will find difficult to deal with unless they fire some employees," Al Mady said.

"We are mixing the benefits, partly with increases and partly with supplementary programmes," he said. These included helping employees buy their homes, offering engineering and finance courses, and management training, he said.

"We cannot continue this escalation of salaries," he said.

A shortage of talent was also an issue. "There is a dilution of talent," Al Mady said. "This is affecting the quality and scheduling of construction."   
 
Economic growth in India and the Philippines means  competition to the Gulf for skills from these countries -- a traditional source of labour -- is intensifying, fuelling costs, Al Mady said. - Reuters