Pressure to Delay or Cancel Construction Due to Raw Material Price Surge... "Need to Abolish the Sale Price Ceiling System"

Construction Industry Research Institute: "Government Must Actively Intervene with Tariff Reductions, etc."

The construction site of Changdong Minja Station

Since Russia's invasion of Ukraine, international raw material prices have soared, exacerbating difficulties at construction sites. The sharp rise in construction raw material prices is not only negatively impacting the commencement of new projects but also raising warnings that the entire construction economy could be at risk. There are calls for active government roles such as tariff reductions and the abolition of the price ceiling system for housing sales.

On the 17th, the Construction Industry Research Institute stated in its report titled "Analysis of the Ripple Effects of the Ukraine Crisis on the Domestic Construction Industry" that "the government must actively respond to issues related to construction materials."

Following Russia's invasion of Ukraine on the 24th of last month and the subsequent economic sanctions against Russia, the global raw material supply chain has been disrupted, with crude oil and thermal coal prices surging by 20-80% within a week.

Pressure on construction-related raw material costs has been increasing since the second half of last year and is expected to rise further due to the Ukraine crisis. First, the rise in international oil prices has increased overall transportation and raw material costs. Additionally, the price of thermal coal, an essential item in cement manufacturing, has risen, leading to increased prices for cement-related products. Prices of major finishing materials such as aluminum and nickel have also increased, which is expected to impact the construction industry.

Assuming that from March, crude oil and thermal coal prices rose by 60% and 90% respectively compared to last year's average levels, the calculated increase in production costs shows that building construction costs rose by about 1.5% compared to last year. General civil engineering facilities saw an increase of about 3%, and industrial facilities experienced a rise of 1.0-1.9%. These figures are conservative estimates that do not consider the price increases of steel scrap and other imported raw materials. The actual price pressure is likely to be even higher.

This is likely to lead to a contraction in the domestic construction market, such as a decrease in project commencements. If raw material costs increase and supply becomes difficult, problems may arise not only in ongoing projects but also delays or cancellations of planned projects. Projects already underway will face overall cost increases, raising the risk of bankruptcy. A decline in building commencements will inevitably affect housing sales, which the government has been focusing on recently, potentially stimulating the housing market.

This is why calls for active government intervention are emerging. Researcher Park Cheol-han said, "It is necessary to focus on monitoring the prices of raw materials required for the production of construction materials," adding, "Measures are needed to diversify import sources while easing tariffs." He also added, "Since the price pressure on ready-mixed concrete is expected to be the highest, ways to minimize the increase in ready-mixed concrete prices must be devised."

There are also suggestions that the pricing system of the price ceiling for housing sales should be improved or abolished to secure flexibility in material supply in the private sector. The basic construction cost, which serves as the basis for setting the price ceiling, is announced in February and September, and to reflect the surged material prices in the sales price, housing must be sold after a certain point in time. If sales are concentrated at a specific time, it could further exacerbate material supply issues. Researcher Park said, "It is necessary to shorten the announcement cycle of the basic construction cost, which serves as the basis for setting the price ceiling, to prevent demand for construction materials from concentrating at a specific time," adding, "In the long term, the abolition of the price ceiling system should also be considered."

Construction companies are also required to adopt cautious management plans. Researcher Park said, "If the Russia crisis prolongs and volatility in international financial markets increases, risks could grow further," adding, "Regarding cost issues, plans should be made as conservatively as possible and responses should be flexible."

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