As armed clashes between the United States and Iran rekindle, concerns are emerging that cost pressures on Korea's construction and building materials industries could grow. Disruptions to traffic in the Strait of Hormuz continue, and anxiety is spreading even to the Red Sea, a detour route for Saudi Arabian crude, raising the likelihood that both oil prices and shipping costs will rise. Some also say that if higher costs pile onto shrinking materials demand amid a construction downturn, builders may delay groundbreakings and members of redevelopment and reconstruction associations may face heavier cost-sharing burdens.
On the 23rd (local time), Brent crude settled at $100.69 per barrel, up 7.04% from the prior trading day. Compared with the $89.22 close on the 20th, it rose 12.9% in three days. Concerns that the Red Sea route could also be threatened by Houthi rebel attacks, on top of disruptions to crude shipments through the Strait of Hormuz, pushed oil prices higher.
Goldman Sachs presented a risk scenario in which Brent crude could top $120 per barrel in the fourth quarter if disruptions to traffic in the Strait of Hormuz persist. If oil, now around $100, climbs to $120, the increase would be about 20%.
In a report released in March, the Korea Research Institute for Construction Policy analyzed that if international oil prices rise 20%, overall construction production costs increase 0.42%. It estimated production costs for residential buildings would rise 0.36% and road facilities 1.17%. Civil engineering, which uses a lot of construction equipment and freight trucks, is structurally more affected by oil price increases than housing construction.
The impact of higher oil prices concentrates on diesel, ready-mix concrete, and asphalt concrete. An analysis by the institute of 380 construction input factors found that diesel accounted for 35.2% of the total ripple effect from a 10% rise in oil prices. It was followed by ready-mix concrete at 8.5%, asphalt concrete and asphalt products at 8.4%, and road freight transportation services at 4.2%.
Cement is the sector directly affected. Cement uses large amounts of coal and electricity in the clinkering process, which heats limestone to more than 1,450℃, and in grinding facilities. When international energy prices rise, manufacturing costs increase as well. The Korea Cement Association sees a need to expand the use of recycled resources and waste-heat power generation to reduce reliance on fossil fuels and overseas energy.
The cement industry is also facing weaker demand due to the construction slump. Last year, domestic cement shipments were 38.1 million tons, falling below 40 million tons for the first time since 1991. Shipments this year are expected to come in around 36 million tons. With product prices hard to raise, if coal and electricity costs climb, manufacturers are likely to shoulder the increase in manufacturing costs.
The ready-mix concrete industry is bearing both higher cement prices and shipping costs. In the Seoul metropolitan area, the round-trip haulage rate for ready-mix concrete rose by 4,200 won to 80,000 won per round trip from 75,800 won starting on the 16th of last month. The supply price of ready-mix concrete in the metro area was also raised 4.3% in April, from 95,500 won per cubic meter to 99,600 won.
Rebar prices are also on the rise. The July base price for rebar, based on SD400 and 10 millimeters, is 1,002,000 won per ton, topping 1 million won for the first time in four years. Higher prices for ferrous scrap, along with added burdens from ferroalloys, energy, shipping costs, and labor, contributed.
Petrochemical building materials such as asphalt, paint, polyvinyl chloride (PVC) windows, insulation, and waterproofing are also unlikely to avoid the impact of higher oil prices. Asphalt is produced during crude refining, and paint and synthetic resin products use naphtha as a key feedstock.
In May, the construction cost index was 137.67, up 5.1% from the same month a year earlier. If rising energy prices spread across building materials, disputes over cost increases between builders and clients could flare up again, and the profitability of new projects and maintenance projects could worsen.
A construction industry official said, "At sites before groundbreaking, if material prices rise further, it will be hard to make projects viable with existing construction budgets, so costs will need to be reviewed," adding, "At sites where work is underway, it is hard to immediately reflect the increase in expenses in contract amounts, so builders may have to shoulder the burden or face disruptions to construction schedules."