[Diesel Price Shock] Damage Extends to Construction and Related Industries... "No Measures Beyond Fuel Subsidy Payments"

On the 25th, amid the sharp rise in international oil prices, fuel prices such as gasoline and diesel continue to soar domestically, with fuel price information displayed at a gas station in Seoul. According to the Korea National Oil Corporation's oil price information system Opinet, the average price of diesel sold at gas stations nationwide the previous day was 2,000.93 KRW per liter. This is the first time since April 2008, when nationwide sales price statistics began to be compiled, that diesel prices have exceeded 2,000 KRW.
Photo by Moon Honam munonam@

[Asia Economy Reporters Minyoung Kim and Hyemin Kim] As diesel prices soar to unprecedented levels, the damage caused by the sharp rise in diesel prices is spreading not only to the logistics and transportation industries, which have been directly hit, but also to construction sites. The government has announced plans to lower the criteria for fuel price-linked subsidies to expand support in order to ease the burden of fuel costs. However, if the strong trend in diesel prices continues for a long time, it seems inevitable that diesel-driven inflation and industry sales impacts will follow.

According to industry sources on the 27th, the construction industry, already on high alert due to rising raw material prices, is now facing additional pressure from rising diesel prices, increasing their concerns. This is because all heavy equipment used at construction sites, such as excavators, as well as trucks transporting construction materials, use diesel engines.

Construction companies typically use construction equipment through lease contracts with equipment providers. Fuel costs are reimbursed by construction companies to these providers on an actual expense basis. However, as diesel prices rise, some equipment providers are reportedly demanding increases in lease rates reflecting the higher fuel costs. Among ready-mix concrete trucks and dump truck operators, demands to raise the per-dispatch rate are gradually spreading.

A construction company official said, "The cost increase burden caused by material shortages is similarly appearing due to the rise in diesel prices," adding, "If the subcontractors' demands to reflect the increase in fuel costs are accepted, operating and maintenance expenses will increase accordingly."

Construction companies agree that the rise in diesel prices can be a factor in increasing construction costs comparable to the rise in raw material prices. However, the problem is that increasing already fixed construction costs is by no means easy. Another construction company official, who requested anonymity, said, "For example, in the case of apartment complexes, a general meeting of the association must be held to discuss design changes and construction cost increases, but increasing costs is not as easy as it sounds," adding, "If discussions do not go well, the Dunchon Jugong incident could be repeated in other reconstruction complexes."

The transportation sector is facing similar challenges. City and intercity buses are inevitably suffering sales hits due to rising diesel prices, raising concerns about worsening financial difficulties. A representative from the National Bus Transport Association Federation said, "Due to the prolonged COVID-19 pandemic, city bus sales have decreased by 25% compared to pre-COVID levels, and intercity bus sales have dropped by 58%," adding, "With the additional rise in diesel prices, there are concerns about worsening management difficulties."

Buses operating on routes are run under government control, unlike other industries. It is difficult to reduce the number of runs or change routes based on passenger demand. They must bear the full impact of fuel price increases. For this reason, the federation is requesting the government to further lower the criteria for fuel price-linked subsidies.

Currently, the fuel price-linked subsidy is provided when the price exceeds 1,850 KRW per liter, with the government covering 50% of the excess amount over the base price. However, to support the transportation and logistics industries burdened by the recent sharp rise in diesel prices, the government has decided to lower the subsidy payment criterion by 100 KRW per liter to 1,750 KRW. The payment period has also been extended from July to the end of September. Assuming the diesel price is 1,960 KRW per liter, the total support amount was previously half of the 110 KRW difference from 1,850 KRW, which is 55 KRW, but after the change, it will be 50% of the 210 KRW difference from 1,750 KRW, which is 105 KRW, effectively doubling the support.

However, the industry feels the subsidy effect is not significant and is demanding further lowering of the payment criteria. A representative from the National Bus Transport Association Federation said, "Although the government has introduced a fuel tax reduction measure, the effect of the tax cut has been offset by rising diesel prices," adding, "Even if temporarily, the payment criteria should be drastically lowered to reduce the burden of fuel costs."

The government maintains that it is difficult to lower the criteria further. The fuel price-linked subsidy fund comes from fuel taxes, and due to the fuel tax reduction measure, a decrease in tax revenue is expected, limiting available resources.

A Ministry of Land, Infrastructure and Transport official said, "There is no room to lower the payment criteria further. Due to limited resources, the focus is currently on smoothly implementing the measures starting June 1," adding, "We are monitoring the policy effects to ensure there is no disruption in transportation services and are considering additional measures."