Inflation stemming from the Middle East war is expected to ripple into state-funded construction projects. As global oil prices rise, the prices of rebar, concrete, and asphalt concrete needed for various works are also climbing. This adds an extra burden on top of already higher labor and material costs compared with last year.
◇ After the Middle East war, higher rebar, concrete, and asphalt concrete prices push up construction costs
The Public Procurement Service conveyed to Korea National Railway late last month its view that construction costs for section 9 (15 kilometers) of the single-track electric Donghae Northern Line linking Gangneung and Jejin in Gangwon should be raised by 8.5 billion won. It said the total project cost (314.3 billion won) should also be adjusted up by 2.7% due to higher labor and material costs.
However, there appear to be additional factors that could drive costs for this section even higher. The extra 8.5 billion won burden was calculated based on January prices, but since the Middle East war broke out at the end of Feb., prices for rebar and concrete/cement—essential materials for railway construction—have been rising.
Rail tracks are laid by placing cement sleepers and installing steel rails. This month, the price of high-strength rebar (SD400) rose to 910,000 won per ton, up 95,000 won (11.6%) from March. Earlier, the ready-mixed concrete price index, which reflects cement and concrete prices, also climbed 4.08% in a month as of April.
When material costs rise like this, the Public Procurement Service increases payments to private contractors handling government projects using a "rate adjustment table." When ChosunBiz input April prices into the adjustment table to calculate the cost for section 9 of the single-track electric Donghae Northern Line, it estimated not only the 8.5 billion won in additional labor and material costs now under consideration but also a further 8 billion won in future material costs. If so, the total project cost would be 5.7% higher than at the time of contract.
◇ Full reflection of additional costs from the third quarter… Bank of Korea (BOK) sees construction downturn
The rise in material costs from the Middle East war is expected to be fully reflected in state civil engineering and construction costs starting in the third quarter. Even when a factor for cost increases occurs, the Enforcement Decree of the National Contract Act stipulates that it be reflected after 90 days rather than immediately in payments to private corporations. The Middle East war broke out on Feb. 28, and prices started to rise from March. Accordingly, the point at which additional costs can be reflected is generally seen as after July.
Meanwhile, the Bank of Korea (BOK) expects the construction industry to contract in the third quarter. Last month, the BOK raised this year's economic growth forecast to 2.6% from 2% while lowering only the construction investment institutional sector to 0.6% from 1%.
A Bank of Korea (BOK) official said, "We saw the slowdown in third-quarter economic growth as due to the impact of construction," and noted, "Even if construction investment grows 0.6% as expected, it is hard to view that as a significant rebound."