Volatility in international oil prices is expected to increase due to U.S. and Israeli airstrikes on Iran, which is likely to affect Korea's construction industry. Rising global oil prices lead to higher transportation and construction costs, which could further worsen profitability at domestic builders already in a downturn. If major Middle Eastern countries are engulfed in war, there is also a higher chance that overseas orders by Korean construction companies competing for contracts in the region will be disrupted.
◇ Prolonged Middle East war directly tied to higher construction costs
What the market fears most in this war is a prolonged closure of the Strait of Hormuz by Iran. The strait carries about 26% of the world's seaborne crude and 23% of liquefied natural gas (LNG), making a surge in oil prices inevitable if it is shut for an extended period. According to energy consultancy Kpler, more than 14 million barrels of crude passed through the strait per day on average last year, accounting for one-third of global seaborne crude exports. Three-quarters of the crude that transited the Strait of Hormuz was exported to China, India, Korea and Japan.
Matt Smith, lead analyst at Kpler, said, "The four countries of Korea, China, Japan and India import almost three-quarters of the crude that passes through the Strait of Hormuz," and noted, "These countries will be most affected."
According to the Korea Research Institute for Construction Policy, when international oil prices rise, the spillover effects on production expenses by major construction institutional sectors vary by sector. In a cost analysis assuming a 10% increase in global oil prices, the most affected area is transportation infrastructure construction such as railways, ports and airports, with a 0.14% rise in construction costs. Also, ▲other civil engineering such as water and sewage, agricultural and forestry civil works, and power facilities (0.12%) ▲dwellings construction and nonresidential building construction (0.09%) ▲building repairs (0.1%) would also see expenses increase.
Rising international oil prices also affect production expenses for key construction materials. If global oil prices rise 10%, production expenses for other nonmetallic mineral products such as lime and asphalt products increase 0.33%. In addition, ▲concrete products such as cement and ready-mix concrete (0.21%) ▲construction aggregates and stone (0.19%) ▲rebar and hot-rolled products (0.12%) expenses also go up. Applying this to producing 10 billion won worth of materials, production expenses for other nonmetallic mineral products increased by 335 million won, and ready-mix and concrete products required an additional 212 million won.
Kim Young-deok, senior researcher at the Korea Research Institute for Construction Policy, said, "At domestic construction sites that use a lot of heavy equipment, higher construction costs will be unavoidable," and added, "If the situation drags on, damage will be greater at overseas construction sites that must procure equipment locally."
◇ Fears grow over escalation in the Middle East, a "home turf" for builders
If the war spreads to other countries in the Middle East, delays in deadlines at major construction sites in the region and disruptions to competition for new project awards will be unavoidable. Of Korea's overseas construction orders last year ($47.27 billion), the Middle East ($11.81 billion) accounted for 25.1%.
Iran's Islamic Revolutionary Guard Corps (IRGC) attacked U.S. military bases in the Middle East in retaliatory strikes against the United States and Israel. At least 12 countries, including the United Arab Emirates (UAE), Bahrain, Qatar and Kuwait, were exposed to Iran's retaliation. On the 2nd (local time), the Washington Post (WP) reported, "Even before U.S. and Israeli warplanes struck Iranian targets, officials in Washington and Jerusalem were preparing for possible retaliation. But no one anticipated the speed of the counterattack and its far-reaching ripple effects," adding, "In an instant, about 300 million civilians across more than a dozen countries were swept into the vortex of war."
Agence France-Presse earlier reported that on the 1st (local time), the foreign ministers of the six Gulf Cooperation Council (GCC) countries—the UAE, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait—held a meeting via video connection and condemned Iran's "treacherous attacks," saying they were causing widespread damage.
Hyundai Engineering & Construction, Daewoo Engineering & Construction, Hanwha Construction Division, and Samsung E&A (formerly Samsung Engineering) are carrying out construction projects on the ground. Hyundai Engineering & Construction is working in Saudi Arabia on the "Jafurah gas processing facility" and the "380 kV transmission line construction linked to solar power generation" projects. Daewoo Engineering & Construction is pushing ahead with Iraq's "Al Faw new port development project," and Hanwha is also executing the Bismayah new city construction project in Iraq. Samsung E&A and GS Engineering & Construction are proceeding with the "Fadhili gas expansion" project ordered by Saudi state oil company Aramco. If the war is prolonged, the project periods for these works could be extended.
There is also a possibility that newly tendered projects will be delayed. According to the International Contractors Association of Korea, the six GCC countries agreed in Nov. 2023 to build a $167 billion rail network stretching 2,117 kilometers by 2030 to enhance regional integration. Based on that, each country's rail construction was expected to proceed simultaneously, but war has broken out among Iran, the United States and Israel.
Hwang Yong-sik, a professor of business administration at Sejong University, said, "With uncertainty heightened, there is a strong possibility that bids under way by Middle Eastern countries will be suspended for the time being," and added, "Domestic builders also need to monitor developments and respond accordingly."
Lee Kwon-hyung, senior research fellow at the Korea Institute for International Economic Policy (KIEP), said, "The gap between the United States and Iran is wide, and Iran continues to take a hard-line stance to maintain its regime, so there is a strong possibility this situation will drag on."