"Finally, End of War... Construction Sector Back in Focus" [Click eJongmok]

Alleviation of Construction Material Cost Burdens

Project Capacity and Track Record Are Key

Long-Term Expectations for Expanded Energy Infrastructure Investment

The ongoing negotiations between the United States and Iran to end the war are providing short-term momentum for the construction sector. Analysts say that concerns over rising construction material prices are being alleviated, while expectations for Middle East reconstruction projects and increased investment in energy infrastructure are growing.

Concerns Over Rising Construction Material Prices Eased

On June 17, Shinhan Investment Corp. offered this assessment of the construction sector. First, with the war effectively coming to an end after 106 days, concerns about cost burdens from prolonged conflict are expected to subside, at least for now.

Since the outbreak of the war, prices of key construction material raw materials such as polyvinyl chloride (PVC) and high-density polyethylene (HDPE) have risen by 20 to 40 percent. The construction cost index has also increased by 2 to 3 percent since February. Although construction companies had been responding by relying on existing inventories and diversifying supply channels, if the conflict continued beyond the third quarter, cost pressures were expected to increase further.

Now, with the war effectively concluded, these burdens are seen as having been alleviated. Sunmi Kim, research analyst at Shinhan Investment Corp., explained, "After the Russia-Ukraine war, escalation clauses—which allow for contract price adjustments when major cost factors like raw material prices, labor costs, or exchange rates fluctuate during the contract period—have been improved." She added, "Given this, the impact on costs will likely be limited to temporary increases in certain items that are not reflected in the construction cost index."

Anticipation for Middle East Reconstruction Projects... 'Capacity for Projects' Is Key

In the medium term, attention is expected to shift to the potential for orders related to Middle Eastern reconstruction projects. The International Energy Agency (IEA) has stated that more than 40 key energy assets have been damaged across nine countries. Norway-based energy analytics company Rystad Energy has estimated the scale of reconstruction at up to USD 5.8 billion (about KRW 8.7551 trillion).

Shinhan Investment Corp. believes that non-sanctioned countries such as Qatar, the United Arab Emirates (UAE), and Saudi Arabia are highly likely to begin recovery efforts immediately to minimize economic losses. Emergency repairs are expected to be carried out by existing operation and maintenance (O&M) firms and local contractors through rapid material supply, while full-scale restoration will likely be led by amendments to contracts with existing engineering, procurement, and construction (EPC) firms—such as SAMSUNG E&A, GS Engineering & Construction, DL E&C, and Hyundai Engineering & Construction—after damage assessments and safety evaluations, typically three to twelve months later.

During this process, Shinhan Investment Corp. predicts that short-term beneficiaries will be those companies with available manpower, rather than those with a history of Middle East plant construction. This is because, amid increasing business opportunities, construction companies are expected to prioritize orders based on repeatability, scalability, and profitability. As a result, DL E&C and GS Engineering & Construction are highlighted as likely beneficiaries.

Track Record Is Crucial for Iranian Reconstruction Projects

However, the key issue for Iranian reconstruction projects is whether sanctions will be lifted. Approvals from the U.S. Office of Foreign Assets Control (OFAC), removal from various sanction lists, and internal compliance approvals from banks and insurance companies are all necessary. Thus, the full-scale start is expected to be after next year. Analyst Kim explained, "For the Iranian reconstruction project, certain construction companies are likely to be preferred. In Korea, DL E&C is the representative example, and Hyundai Engineering & Construction also has a proven track record in this area."

In the longer term, the expansion of investment in energy infrastructure is expected to become an even greater area of benefit. As risks related to the Strait of Hormuz have become apparent, energy-importing countries are seeking to diversify their supply sources. The Middle East is expected to focus on infrastructure restoration, bypass pipeline construction, and expansion of storage facilities around 2027 to 2028, and subsequently expand investments in energy infrastructure such as liquefied natural gas (LNG), carbon capture, utilization and storage (CCUS), and nuclear power generation.

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