Rising Tensions in the Middle East... "Impact on Overseas Construction Strongholds Depends on Escalation"

Risk of Raw Material Price Increase if Middle East Conflict Expands
Construction Industry "Preemptively Reflecting Geopolitical Risks in Bidding"

As military clashes between Israel and Lebanon's pro-Iran armed group Hezbollah escalate, domestic construction companies involved in the overseas construction market are tightening their vigilance. Although the conflict countries are not considered strongholds for orders in the Middle East region, the companies are closely monitoring the situation, concerned that if the conflict prolongs like the Ukraine-Russia war or spreads across the Middle East, it could drive up construction costs.

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Industry Mitigates Impact Through Preemptive Measures

A construction industry official said on the 8th, "There is no immediate impact (from the war), but it could change depending on whether the conflict escalates," adding, "Especially if Iran blocks the Strait of Hormuz, a key route for Middle Eastern oil exports, international oil prices will soar, leading to a rise in raw material costs."

Currently, about 20% of the world's crude oil supply passes through this strait at the entrance of the Persian Gulf. Therefore, if the strait is blocked, there are forecasts that international oil prices could surge to $200 per barrel. This points to a possible recurrence of the raw material price surge seen after Russia's invasion of Ukraine. International oil prices rose to $105 per barrel on February 25, 2022, for the first time since 2014. After fluctuations, prices fell below $80 per barrel but have recently increased by nearly 10% in the past week.

Construction companies are responding to raw material price increases and are also engaging in currency hedging for contracts signed in various countries. This is a precaution against the potential collapse of the currencies of the conflict countries due to the war. Since contracts are signed considering various variables such as geopolitical instability in the Middle East, the impact is expected to be limited.

Another construction company official said, "Raw material prices may rise due to increased logistics costs and international oil prices," but added, "We reflect raw material price increases in bids and adjust the timing of raw material orders, so the impact on profits and losses will be minimal." They also noted that existing projects will not face difficulties in receiving payments after completion, as contracts have already been established.

Will Oil-Producing Countries Expand Orders Amid Rising Oil Prices?

Construction companies gave a negative assessment regarding the prospect of oil-producing countries expanding new orders due to rising international oil prices. They judged it difficult to predict the timing of orders amid existing uncertainties.

In particular, if the conflict spreads across the Middle East, it is expected to be difficult for the South Korean government to achieve its goal of $40 billion in cumulative overseas construction orders this year. According to the Overseas Construction Association, cumulative overseas construction orders from January to August this year amounted to $17.95673 billion, which is 81.9% of the same period last year ($21.93243 billion). Compared to the same period in previous years, this is the smallest scale since 2021, when about $16.2 billion was recorded.

Whether the order achievement target will be met must be observed until the end of the year, but since the Middle East accounts for 60% of the total cumulative orders, the possibility of significant damage in case of escalation cannot be ruled out. An industry official said, "Not only 'One Team Korea' but also the government's role will become more important economically," adding, "Construction companies are also striving to overcome various challenges."