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5 Aug 2008

Real Estate and Construction

Runaway Construction Material Prices: Hitting Construction and Real Estate Businesses (Business Breif No.2245)

This year, the prices of construction materials have shot up to record highs. A recent report on the Construction Materials Price Index for July 2008 released by the Ministry of Commerce shows some interesting points, as indicated below:
- The Construction Materials Price Index in July 2008 rose to 177.0, increasing 1.0 percent over 175.3 in June, YoY, soaring 31.1 percent up over the 29.3 percent growth in June's increase. This latest increase stemmed largely from much higher steel prices that are up an average of 75.7 percent over-year, as well as hikes in other major construction material prices.
- However, KResearch forecasts that the prices of construction materials over the remainder of this year may ease slightly due to a slump in domestic oil prices, a major transportation cost for construction materials, in line with the global oil market coupled with the recent reduction in excise tax on fuels. At the same time, global raw material prices, particularly for steel, may cool in line with the global economic slowdown. The full-year Construction Materials Price Index is therefore projected will increase to around 25 percent growth, rising dramatically over the 4.9 percent seen in 2007. This may be the highest increase experienced since the first Oil Crisis, 1973-1974.

The rather sudden increase of 25 percent in construction material costs over a period of one year dealt a severe blow to construction projects. On average, the cost of construction materials and decorative items accounts for 60 percent of the project construction value. Even worse, amid exorbitantly high transportation, energy and labor costs, construction and real estate businesses have been hit hard. This is also true of the cost estimates on the government's mega-projects. With this hindrance to the progress of these projects, the nation's investment growth may fall short of projections, which will eventually affect economic growth over the latter half of this year.

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