Why Major Construction Firms Remain Unfazed Even as the Exchange Rate Nears 1,500 Won

Construction Costs Rise Only 2.0% Annually Even with High Exchange Rates
Exchange Rate Sensitivity at 0.86%... Low Import Dependency Limits Impact
Risk Diversification through Currency Hedging and Multi-Currency Contracts
Structural Gaps Le

Recently, concerns have been growing in the construction industry over rising construction costs and higher sales prices due to the prolonged period of high exchange rates. However, major construction companies have remained relatively calm in their response. Having experienced a "construction cost shock" during the outbreak of the Russia-Ukraine war in 2022, these companies are now regarded as having already established structural systems to withstand exchange rate risks.

S-OIL Shahin Project PKG1 Construction Site in Hagnam-ri, Onsan-eup, Ulju-gun. Photo by Yonhap News.

According to the Korea Institute of Civil Engineering and Building Technology on November 28, the construction cost index for September stood at 131.66. This index reflects price fluctuations in overall construction costs-including materials, labor, and equipment-using the 2020 level as the base of 100 to calculate the rate of change. While the index has continued to rise each year, the pace of increase has gradually slowed: 111.5 (+11.5%) in 2021, 123.8 (+11.1%) in 2022, 127.9 (+3.3%) in 2023, and 130.1 (+1.7%) in 2024. Even taking into account the exchange rate this year, the increase is expected to remain around 2%. This is cited as the primary reason why large construction companies remain relatively unfazed by the high exchange rate.

In particular, the construction industry is less sensitive to exchange rate fluctuations compared to other industries. According to the institute, the import dependency rate for construction is about 3.4%, which is significantly lower than electricity and gas (25.4%) or manufacturing (19.2%). Even if the exchange rate rises by 10%, the primary cost increase is just 0.34%, and even when including secondary cost increases through backward-linked industries, the total is only 0.86%.

The impact of high exchange rates is also limited when broken down by material. Only certain materials-such as rebar (15%), stone products (31.2%), and plywood (39.6%)-have high import dependency. Most materials are sourced domestically or from neighboring countries such as China, and are often secured through annual contracts, meaning that even a short-term spike in the exchange rate is not immediately reflected in costs.

Major construction companies have already established sophisticated systems to cope with high exchange rates. A representative from Samsung C&T’s construction division stated, "We are simultaneously pursuing third-country procurement and currency hedging to manage exchange rate risks, and we also manage cash flow and material supply in an integrated manner." Hyundai Engineering, with a high proportion of overseas projects, secures dollar-denominated bonds while sourcing domestic materials independently to reduce risks.

GS Engineering & Construction incorporates foreign exchange reserves at the bidding stage and uses forward contracts during execution to respond to exchange rate fluctuations. Daewoo Engineering & Construction utilizes multi-currency contracts-including dollars, euros, and local currencies-in order contracts, and also implements currency risk hedging strategies through financial products. A representative from DL E&C responded, "We secure most materials stably through long-term contracts."

These currency risk management systems were established in response to the shocks experienced during the Russia-Ukraine war in 2022. After facing the collapse of global logistics networks and soaring material prices, construction companies overhauled their procurement, contract, and exchange rate management systems. A representative from a major construction company said, "At the time, we experienced disruptions in material supply and a series of canceled contracts. Since then, price reserves and currency defense strategies have become standard practice."

However, small and medium-sized construction firms, subcontractors, and companies unable to secure annual contracts are finding it difficult to avoid the direct impact of high exchange rates. In the case of government-ordered projects without price adjustment clauses, rising material costs can directly lead to reduced profitability.

Experts acknowledge the possibility of a prolonged high exchange rate environment but caution against excessive fear-mongering.

Lee Eunhyeong, a research fellow at the Korea Institute of Construction Policy Studies, said, "Claims that high exchange rates will sharply increase domestic construction costs and hinder housing supply are exaggerated. Since construction companies have already established multi-layered response systems, it is more important to focus on strategies tailored to medium- and long-term exchange rate volatility, rather than short-term shocks."