Iran comes as mixed blessing to Korean builders

By Choi Sung-jin

The upcoming reopening of the Iranian market may prove to be a double-edged sword for Korean contractors, industry sources said Wednesday.

Iran’s pent-up demand for building social infrastructure and oil plants is a boon for order-thirsty construction companies, they said. However, if Tehran aggressively resumes exporting crude oil to revitalize its economy, it could lead to an aggravation of the overseas construction market.

The Iranian government is expected to place orders worth $60 billion or more this year for building new gas and oil plants and modernizing the existing ones, according to industry officials.

Teheran reportedly plans to invest most of the $100 billion that had been frozen under the West’s economic sanctions into replenishing oil infrastructure, modernizing aged refinery facilities. Iran, a major oil producer, imports 5 million barrels of gasoline a day because of its outdated refining plants. Hyundai E&C and Daelim Industrial are expected to benefit from such plans.

Others are less optimistic about another Middle East boom, considering the complex effects that Iran’s comeback to the international business stage will have on the economies of other oil producing countries. Above all, Iran’s resumption of oil exports may likely add fuel to a plunge in international crude prices, they said.

Iran’s daily oil production is expected to rise up to 4.3 million barrels before long, forcing Tehran to ship out most of it to save heavy storage costs. In the worst-case scenario, international oil prices could drop to the mid-$20 range in the near future, they said. This will strain the financial conditions of other Middle East countries, forcing them to cancel or postpone the placement of new orders, most of which have been set based on the assumption that oil prices will stay at around $75 per barrel.

The financial crunch resulting from oil price fall could also spread to emerging economies if and when the Middle East countries withdraw their oil money invested in those countries. That will inevitably pull down the emerging countries’ currency values, which will in turn force them to also revoke and put off major projects.

“If Iran fails to earn money by resuming oil exports, the easing of economic sanctions will unlikely be of much help for Korean builders,” an analyst said.

An industry executive also agreed, saying, “Iran’s comeback by itself is definitely a boon but the overall situations may not be so good, taking into account other factors such as oil prices and the economic situation of oil producers and emerging economies.”

Before 2010, Iran was the fifth-largest construction market in the Middle East, and sixth-largest in the world. Korean construction companies carried out 97 projects worth $12 billion in the country.

“The growth potential of the Iranian market is big. If the country’s fiscal conditions do not improve soon, however, Korean companies, which boast excellent construction ability but weak in funding, may find themselves in a disadvantageous position in competing with cash-laden rivals,” said Kim Chong-guk, an official at International Contractors Association of Korea. “The government ought to provide support, which of course, will pay off handsomely in the long run, not just the construction industry, but for the whole country.”