[Why&Next] High Oil Prices, a Boon for Overseas Construction? ... Caution Needed on Cost Ratio

Amid forecasts of prolonged high oil prices due to conflicts in the Middle East, the domestic construction industry's attention has turned to the Middle Eastern market. The focus is on the fact that if oil prices rise, the financial capacity of Middle Eastern clients will increase, thereby expanding opportunities for contract awards. The strategy is to secure performance through new orders from the Middle East while managing the inflationary impact caused by high oil prices.

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The Overseas Construction Association cited the Middle East construction specialist publication MEED on the 18th, reporting that contract values in the Middle East construction market reached $253.7 billion last year. This is the highest figure in the history of overseas construction. Notably, contracts from Gulf Cooperation Council (GCC) countries such as Saudi Arabia and the United Arab Emirates (UAE) accounted for $205 billion, representing 81% of the total.

The association analyzed that this was due to large-scale projects being actively ordered in Middle Eastern oil-producing countries whose fiscal conditions improved due to rising international oil prices. High oil prices create a virtuous cycle where clients gradually improve profits and make large-scale investments, leading to increased orders. Recently, oil prices have continued to rise. On the New York Mercantile Exchange, May delivery West Texas Intermediate (WTI) and June delivery Brent crude oil are trading around $90 per barrel, marking the highest prices since late October last year.

International oil prices are expected to continue their upward trend. The recent escalation of military conflicts between Israel and Iran is stimulating oil prices. Analysts interpret this not as a typical upward trend but as the Middle East conflict risk being priced in advance in crude oil futures. They predict that as long as the conflict does not prolong, there will be no major issues. However, the trend of geopolitical conflicts such as the Russia-Ukraine war entering a prolonged phase remains an obstacle. Additionally, production cuts by oil-producing countries may drive oil prices higher. JP Morgan pointed out that Russia's production cuts could actually push oil prices up to $100 per barrel by September.

Thanks to high oil prices, the Middle East construction market is expected to grow by double digits this year. Global market research firm IHS Markit forecasted in January that the global construction market size would grow 4.4% year-on-year to $14.4433 trillion this year. Among this, the Middle East construction market is expected to grow by 10.3%.

The association is focusing on over $2 trillion worth of pre-execution projects latent in the Middle East construction market. The domestic construction industry is closely watching these projects for potential entry. By sector, the energy and industrial sector is the largest at $829 billion, followed by building construction ($541 billion), power and water ($427 billion), and transportation ($361 billion). By country, Saudi Arabia is expected to offer abundant business opportunities with $630.4 billion, accounting for 29% of the total.

The construction industry is also busy targeting the overseas construction market centered on the Middle East to overcome the domestic housing market slump. Earlier this month, Samsung E&A (formerly Samsung Engineering) and GS Engineering & Construction secured the largest plant project in Saudi Arabia's contract history, while closely monitoring the movements of major Middle Eastern investors backed by "oil money." Hyundai Engineering & Construction is aiming to win orders for projects including Saudi Arabia's NEOM, the Ruwais liquefied natural gas (LNG) project, and the Safaniyah GOSP project this year. GS Engineering & Construction is pursuing orders in Oman and the UAE, while Daewoo Engineering & Construction is targeting Iraq. A senior official from a major construction company hinted, "Recently, the exchange rate has also risen, which is positively evaluated for foreign exchange gains, but in reality, the impact is minimal."

Panoramic view of the Fadili Gas Plant Complex in Saudi Arabia / Photo by GS Engineering & Construction

However, the industry believes that inflationary pressure due to high oil prices is unavoidable. A construction company official said, "In the event of Middle East conflicts, issues such as airspace closures in the affected and neighboring countries may cause difficulties in personnel movement, and if prolonged, oil prices and inflation will rise." Another official explained, "High oil prices stimulate raw material prices and interest rates, which could deteriorate profitability, so this is a concern separate from expectations of increased orders from the Middle East."

The association stated, "High growth is expected across the Middle East construction market, including Saudi Arabia, the second-largest overseas construction order country last year, and the UAE, ranked sixth." It added, "Our companies need to strengthen their competitiveness in securing orders through partnerships with global advanced companies and localization policies." It further noted, "Given the conservative fiscal spending outlook, the risk of war in Israel, and political risks such as the U.S. presidential election, caution is needed regarding the capacity for large-scale project orders."