Hopes grow for Korea's new construction boom in Middle East

Minister of Land, Infrastructure and Transport Won Hee-ryong, back row center, and Hyundai E&C CEO Yoon Young-joon, front row right, pose with participants of a signing ceremony for the Amiral project at Aramco's headquarters in Dhahran, Saudi Arabia, June 24. Courtesy of Ministry of Land, Infrastructure and Transport

Builders expect additional mega-size orders from Saudi Arabia, Iraq, UAE

By Park Jae-hyuk

A $5 billion order Hyundai E&C won late last month in Saudi Arabia was large enough to dispel skepticism over Korea's ambitious plan to win $50 billion in overseas construction orders every year until 2027.

As a result of the biggest contract a Korean builder signed in Saudi Arabia, the size of overseas construction orders the Asian country won during the first six months of this year soared to $17.3 billion, up 44 percent from a year earlier.

Hyundai E&C's latest deal is related to the construction of petrochemical plants in the Saudi Arabian city of Jubail, which are part of the Middle Eastern country's state-owned Aramco's $11 billion Amiral project.

Some industry insiders therefore recalled the construction firm's founder, late Hyundai Group Chairman Chung Ju-yung, who played a major role in the Korean builder defeating European competitors in a bid for a construction order to build an industrial port in Jubail in the early 1970s. The achievement at that time led to the construction boom for Korean builders in the Middle East, which enabled the companies to make huge profits from the oil-rich region.

As other Middle Eastern nations are recently following Saudi Arabia by placing mega-size orders with Korean builders, there is rising anticipation over a second construction boom in the region, which could revitalize Korean firms that have been struggling due to a slowdown in domestic construction orders for homes.

"Even in June, it appeared that Korean builders had lost momentum in winning overseas construction orders after losing several bids," eBest Investment & Securities analyst Kim Se-ryeon said. "The recent mega-size order that Hyundai E&C won in Saudi Arabia is a meaningful achievement which raised hopes of more orders for the construction of overseas plants."

Before Hyundai E&C won the order, the Export-Import Bank of Korea cut its outlook for the total size of overseas construction orders this year to $30 billion from $35 billion.

"Due to the global economic slowdown, weak oil prices, high interest rates and soaring construction costs in the aftermath of the lingering inflation, conditions are worsening for builders to win overseas construction orders," Park Sung-yoon, head of the state-run bank's overseas economic research institute, said during a forum on June 20.

In contrast, the government has continuously expressed confidence about the second construction boom in the Middle East.

Minister of Land, Infrastructure and Transport Won Hee-ryong, who traveled Saudi Arabia with Korean construction industry officials last month, also said on Monday that the government will enhance its support for Korean builders to win more orders from Middle Eastern countries.

"Saudi Arabia also seeks cooperation with Korean firms to build ammonia plants for the hydrogen economy," the minister told reporters.

Minister of Land, Infrastructure and Transport Won Hee-ryong, left, escorts Iraq's Trade Minister Atheer Al-Ghurairy, during the ninth session of the Korea-Iraq Joint Committee meeting at Grand Hyatt Seoul, June 21. Yonhap

Forthcoming projects

Last month, the Korea-Iraq Joint Committee resumed meetings for the first time in six years, raising hopes for the resumption of Hanwha's $10 billion project to build the Bismayah New City southeast of Baghdad, which was suspended after the Middle Eastern country delayed payments for the construction.

"Iraq's political situation has stabilized rapidly, so we are discussing collaborative projects through the joint committee," the minister said.

Daewoo E&C also expects to win additional construction orders involving the Al Faw Port in Iraq and a project to build a naval base in the country.

In the United Arab Emirates, GS E&C aims to win more orders to build desalination plants through its subsidiary, GS Inima.

Hyundai E&C and Samsung Engineering are waiting for the result of a bid to participate in the phase 2 project to develop Saudi Arabia's Jafurah gas field.

In addition, more orders are expected to be awarded in the Middle East to Korean construction project management companies, such as HanmiGlobal.

"HanmiGlobal is expected to start winning large-size orders from the first quarter of next year, regarding the NEOM," SK Securities analyst Heo Sun-jae said. "The $500 billion project is part of the $1 trillion Vision 2030 project led by the Saudi Arabian crown prince, so investors should keep paying attention to this."

Risk factors

Domestic construction firms, however, are also warned about the risks of conflicts related to their projects in the Middle East.

"Korean firms should be cautious about protecting the confidentiality of the orders they won in the Middle East, until the project owners disclose details to the media," said an insider of a construction firm participating in major projects in the Middle East.

Deloitte Anjin advised builders to be careful about saving documents related to their construction projects in the Middle East, because they can use them as the proof for their claims, in case of conflicts arise with clients.

For Korean companies to avoid conflicts with Middle Eastern clients, lawyers from Bae, Kim & Lee said in a recent seminar that it is important for them to develop close ties based on a deeper understanding of business practices in the region.