Low oil price nightmare becomes reality for builders

By Choi Sung-jin

Korean construction companies have long worried about the low oil prices stemming from the Middle East. Now the companies are seeing and feeling the shock.

Domestic builders received orders worth $11.88 billion from the Middle East this year, down 44 percent from a year earlier, the International Contractors Association of Korea (ICAK) said Tuesday. The protracted softness of international oil prices seemed to have tightened purse strings in the Middle East, the association said.

The price of Dubai light, a yardstick for order receipts by Korean builders, has remained in the $30 range this year, half of the $65.6 per barrel recorded in May 2015. As of last Friday, the price had edged up to $41.01.

The financial crunches of major clients have led to an emergency situation for Korean construction firms. Saudi Arabia has suspended almost 30 out of about 50 construction works for its King Abdullah Financial District project. Samsung C&T, which is taking part in the project, has yet to suspend its works, but is facing a delay in its schedule because of overdue payments.

The King Abdullah Financial District project aims to be the largest financial hub in the Middle East on a 1.6 million-square-kilometer site near Riyadh, at a cost of $7.8 billion.

Early this year, GS Construction has been designated as preferred bidder for building “process offshore crude” (POC), a facility for refining heavy oil, by Takreer, a subsidiary of the Abu Dhabi National Oil Corporation. But Takreer has since put off the signing the contract for the $2.5-billion project, refusing to deliver the letter of intent, company officials said.

The situation is not much different with Hanwha E&C, which won a 9 trillion- won ($7.8 billion) project to build a town in Bismayah, Iraq, in 2012. Construction has been going on and Hanwha has received 200 billion won from its Iraqi client, but is concerned about the opaque payment schedule in the future. Iraq, under constant threats from religious and tribal conflicts and terrorist acts, has a very unstable work environment.

Also most Middle Eastern countries reportedly will begin financial austerity this year, more bad news for Korean builders. The “fiscally balanced oil price” -- the level of oil prices that can keep oil producers from recording a fiscal deficit -- has fallen sharply from last year to $45-$50. The lower figure means clients will either put off placing orders and/or suspending existing works while delaying payment.

A report by NICE Investors Service, a credit-rating agency, said the business risks would likely be particularly high in Saudi Arabia and the United Arab Emirates.

“In the case of Saudi Arabia, which has a population of more than 30 million, a high unemployment rate, and a fiscally balanced oil price of over $100, new order placements are negligible,” it said. “As Riyadh obligates foreign builders to hire locals, project profitability has also aggravated rapidly to push up the rate of cost to sales to high levels.”

“Since 2013, major domestic builders’ credit ratings have been downgraded because of the massive readjustment of the cost-to-sales rate for their large projects in the Middle East,” the report said. “If completion of the projects that began in 2009-2013 is delayed, it will take more time to dissolve uncertainty in the overseas construction sector.”