Will the Nightmare of the Russia-Ukraine War Return? Construction Industry on Alert Over Rising Costs [Real Estate AtoZ]

Intraday Oil Prices Surpass $100
60% Surge in Oil Prices Could Raise Construction Costs by 3%
Cost Pressures Emerge First in Civil Engineering
Construction Cost Increases Expected to Be Limited Compared to Russia-Ukraine War

As geopolitical tensions in the Middle East escalate due to the war between the United States and Iran, the construction industry is on high alert. If oil prices continue to rise, the cost of raw materials could surge, undermining profitability. However, some predict that the recent decline in construction starts will limit the impact of this situation on the industry, making it less severe than the shock caused by the Russia-Ukraine war.

According to the closing data from the New York Mercantile Exchange on March 9 (local time), the price of West Texas Intermediate (WTI) crude oil for April delivery rose by about 4% from the previous trading day to $94.77. This is the highest closing price since August 29, 2022. During Asian trading on the same day, the price climbed as high as $119.48.

Following airstrikes by the United States and Israel on Iran, the de facto blockade of the Strait of Hormuz—a key route for global oil transportation—has caused oil prices to spike. Goldman Sachs has projected that if oil shipments through the Strait of Hormuz do not return to normal, international oil prices could soar to $150 per barrel.

Soaring Oil Prices Push Up Construction Costs ... Expected Impact Smaller Than Russia-Ukraine War

The construction industry is closely monitoring the effects of the Middle East conflict on the sector. So far, no casualties have been reported among Korean companies operating in the Middle East, but there remains a possibility that rising oil prices will increase construction costs in the future. During the Russia-Ukraine war, surging raw material prices caused the construction cost index to jump from 100 (base year 2020) to 125.7 in December 2022.

A representative from a mid-sized construction company commented, "Recently, the construction industry has been improving its cost structure as high-cost projects started between 2021 and 2022 have been wrapped up. However, if oil prices rise and material costs surge again, projects scheduled for sale will be forced to increase construction costs, which could lead to conflict with cooperatives."

The impact of rising oil prices is expected to be felt most acutely at civil engineering sites. The Korea Research Institute for Construction Policy estimated that if oil prices increase by 60%, construction costs for civil engineering facilities and buildings would rise by about 3.0% and 1.5%, respectively. Civil engineering projects are particularly vulnerable to oil price hikes due to asphalt concrete (ascon). Ascon is a core material for road paving, with petroleum accounting for as much as 70% of its production cost, making it highly sensitive to oil prices. The institute projected that a 10% rise in oil prices would result in about a 2.2% increase in ascon prices. Prices for ready-mixed concrete and rebar, which hold significant weight in housing construction, are expected to rise by 0.5% and 0.1%, respectively.

Park Cheolhan, a research fellow at the Korea Research Institute for Construction Policy, explained, "Civil engineering sites rely heavily on ascon and use heavy equipment that requires diesel, so they are expected to be affected most quickly by rising oil prices. Construction companies concerned about increased costs may also delay the start of new projects."

However, some analysts believe that the current situation will not have as much of an impact on the housing market as the Russia-Ukraine war did. This is because the volume of housing starts has dropped significantly compared to that period, and thus, the upward pressure on material prices due to supply shortages is also limited. According to the Ministry of Land, Infrastructure and Transport, the accumulated number of housing starts last year totaled 273,000 units, a decrease of about 110,000 units compared to 2022, when the Russia-Ukraine war broke out (386,000 units).

Researcher Park added, "Compared to the time of the Russia-Ukraine war, construction starts have declined, and with the construction market slump, there is also a surplus of steel and cement inventories. Unlike several years ago when the supply-demand imbalance was acute, demand for construction materials itself is expected to decrease, so construction costs are also likely to rise only within a limited range."

This content was produced with the assistance of AI translation services.