Rising Raw Material Costs and Safety Budget Burdens... Growing Concerns Over Deficit Construction Sites

On the first day of the Serious Accidents Punishment Act enforcement, which allows for the punishment of management officials when serious accidents such as worker fatalities occur, managers are conducting a safety inspection at an apartment construction site in Gyeonggi-do on the 27th. Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporter Kim Min-young] Construction companies are facing increasing difficulties due to the combined impact of safety budget burdens following the enforcement of the Serious Accidents Punishment Act and soaring raw material prices such as cement and rebar. If raw material price increases continue to exceed the average profit margin, it could lead not only to worsening financial difficulties but also to operating losses.

A representative from the Korea Construction Association stated on the 8th, "The average profit margin for construction companies is 3%, but rebar prices have risen beyond this average profit margin, raising concerns about construction companies operating at a loss," adding, "If the surge in raw material prices continues, companies will have no choice but to undertake loss-making projects."

According to the association, high-strength rebar (SD400) used in structural work at construction sites was traded at 1.06 million KRW per ton last month. This is nearly a 50% increase from 670,000 KRW in January last year to over 1 million KRW currently. Cement prices also rose by 18%, from 78,800 KRW per ton in July last year to 93,000 KRW in early January this year. A representative from the Korea Iron & Steel Association said, "Demand for rebar has exploded as construction demand, which was suppressed due to COVID-19, has revived."

With raw material prices remaining high, construction companies that need to renew annual contracts at the start of the year are also struggling. A representative from D Construction said, "The purchasing department is currently drafting new annual contracts for raw materials such as rebar, but since last year, raw material prices have risen significantly, greatly increasing cost burdens," adding, "Due to the price ceiling system for pre-sale prices, it is difficult to reflect raw material price increases in the sale prices."

Typically, large construction companies ranked within the top 100 enter into short-term or semi-annual contracts with raw material suppliers to secure supply. However, small and medium-sized construction companies outside the top 100 procure rebar, cement, and other materials as needed through distributors, much like shopping in the market. Considering that 95% of all construction companies are small and medium-sized, the majority inevitably bear the full impact of raw material price increases. While large construction companies can secure supply stability through pre-existing contracts, they are not free from the burden of rising raw material prices since these contracts do not fix prices, according to industry insiders.

The problem is that there is no clear way to alleviate the burden of rising raw material prices. Cost reduction is necessary, but the recent enforcement of the Serious Accidents Punishment Act has increased safety-related costs, including securing separate safety budgets. A construction industry official said, "It is necessary to reflect the increase in raw material prices in future housing projects, but this is practically impossible," adding, "Extremely speaking, the only option is to reduce the building from five floors to four."

Stabilizing raw material prices this year also seems unlikely. This is because the construction industry is expected to perform well this year. The Korea Construction Policy Institute forecasted that domestic construction orders will increase by 2% to 220 trillion KRW this year, compared to 216 trillion KRW last year. A representative from the Korea Iron & Steel Association said, "The construction industry is expected to be at a similar or improved level compared to last year," adding, "If demand for raw materials such as rebar increases accordingly, it will be difficult for raw material prices to stabilize this year."

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