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Heading Overseas to Beat Domestic Stagnation
The number of orders won overseas by Korean construction companies is showing an upward trend.
Heading Overseas to Beat Domestic Stagnation
  • By matthew
  • November 1, 2011, 13:50
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Korean constructors’ overseas orders were low during the first half of the year mainly because of the European fiscal crisis and democratization movements in the Middle East and North Africa. However, constructors are now winning continuous large-scale projects, making it likely they will meet their targets for 2011.

Last year, Korea obtained a US$18 billion-worth nuclear power plant construction project in the United Arab Emirates. Due to the base effect of this, the volume of orders received this year is relatively smaller. According to October 6 data from the International Contractors Association of Korea (ICAK), the figure stood at US$37.5 billion as of the end of Q3, approximately 31% less than a year earlier.

In the UAE, contracts awarded between Q1 and Q3 of 2010 totaled US$24.4 billion, but dropped to US1.9 billion for the first three quarters of 2011. In Kuwait, the 2011 total has remained at just 27% of last year over the same period. Korea has won a number of construction projects in Kuwait and the rest of the Middle East region. Though the amount reached no less than US$22.8 billion in 2010, it is currently showing a 44% year-on-year decrease.

Nevertheless, the numbers do not tell the whole story. Korean builders are doing extremely well overseas. Many are striving to penetrate overseas markets and their efforts are paying off. Amid stagnation in the domestic sector, they are finding their breakthrough in global markets.

In particular, the recovery is picking up speed in the Middle East regions, where pro-democracy rallies hindered new construction undertakings. In 2011 alone, Korean builders have recorded orders totaling US$11.7 billion in Saudi Arabia and US$3.2 billion in Iraq, the latter being 24 times higher than the amount last year. The Iraqi government anno-unced back in July that it planns to invest US$186 billion between 2010 and 2015 for the purpose of national reconstruction. It is in this context that Korean constructors such as Hanwha E&C decided to make inroads there earlier this year. The UAE, Saudi Arabia, Kuwait and Qatar are also preparing to launch projects worth around US$100 billion in 2H, signaling another boom in the overseas construction industry. In the meantime, Samsung C&T announced its participation in a Saudi Arabian combined cycle power station project in September, while Hyundai Engineering signed a contract to build a plant for oil well development in Algeria. (Refer to the box)

This energetic rebound has also been witnessed in Asia. There, the value of orders received has increased 14% from a year ago, amounting to US$11.3 billion as of the end of Q3. This includes US$2.7 billion in Singapore and Vietnam and US$1.3 billion in Indonesia. Larger construction companies have won numerous civil engineering and building projects in Singapore, while their smaller counterparts have increased their total value five-fold and nine-fold in Malaysia and Indonesia, respectively. This has led to an improved performance in the civil engineering segment, where the amount has doubled to US$4.4 billion. Meanwhile, Lotte E&C announced it had signed a Hyatt Regency Hotel construction deal in Mongolia. (Refer to the box)

Construction Industry Taking Pains to Build Overseas-oriented Personnel Structure

With an increasing number of Korean constructors setting foot overseas, the industry’s manpower structure is also transforming; placing more weight on foreign markets. However, the supply of personnel capable of handing overseas construction projects cannot currently meet demand. As a result, industry experts are emphasizing the importance of a whole new perspective in order to catch up with changing market demands.

In particular, they are claiming that more plant-related professionals need to be employed as that segment accounts for the largest share of overseas orders. Well aware of this urgency, construction companies continue to scout experts with experience in plant construction, resulting in an exceptionally high number of people moving from plant companies to constructors this year. Some builders are even hiring foreigners due to the lack of domestic personnel. “The government, colleges and industry have to do what they can do together so that specialists in diverse areas such as plant construction can be nurtured effectively,” said an industry insider.

Following such advice, the Ministry of Land, Transport and Maritime Affairs has established overseas construction and contract departments at local and metropolitan colleges, respectively. At the same time, the two national agencies offering short-term training courses have increased their quota of trainees from 900 to 2,000, while an additional third agency will also be created. The five institutes are planning to boost the size of their trainees from the present’s 500 during the period, too.

Product and Market Diversification Matters

Korean constructors have successfully forayed into overseas construction markets, coping with the doldrums in the domestic sector. More recently, however, some experts have claimed that such efforts are rather lopsided. According to them, constructors are advised to pay attention to the fast-developing construction markets of Latin America instead of concentrating on the Middle East.

In this vein, the Construction Economy Research Institute of Korea (CERIK) held an international seminar on September 29 under the theme of global cooperation to fare better in Latin American markets. Participants remarked that construction firms, which are leaning too much on the Middle East, need to turn their attention to Latin America with a fresh viewpoint and approach. “In 2010, Korean builders won 94% of their overseas orders in the Middle East, North Africa and Asia, with 80% of these being plant construction,” said CERIK rese-archer Lee Bok-nam, adding, “The figures clearly show that they still have a far way to go to address regional and industrial lopsidedness.”

CERIK also came up with seven variables that are likely to come into play in 2012: scale and progress of recovery from the Sendai earthquake; rise in the cost of construction materials and equipment caused by increasing investment in China and India; decline in employment following productivity improvement; political stabilization and investment drive by emerging nations; development changes by countries with abundant natural resources; renewed recognition of the Middle and South American markets; and a rise in the prices of input factors in construction.

“In order for local construction firms to be able to continue their growth globally, they should try harder in regards to market creation and diversification, while pursuing cooperation with global players in regards to risk management,” added the researcher.

Construction Firm Shares Plummet Temporarily on Unfavorable Con-ditions

Construction companies’ stocks are characterized by a higher level of market volatility than others. They reacted more sensitively recently to the European financial crisis and American double dip recession. In fact, most fell recently due to mushrooming concern that the global economic slump would strike a blow against Korean constructors’ overseas business. “The current weak oil prices are seen to severely curtail the size of new construction orders in the Middle East,” said a securities analyst, adding, “The possibility cannot be ruled out that the weak Euro will compromise Korean companies’ price competitiveness in the region with its European rivals.”

However, the industry is claiming the opposite. A construction industry expert brushed aside concerns, claiming the remark was groundless. “The price of Dubai crude is still high and Saudi Arabia, one of the nations awarding the biggest number of contracts, has maintained a very conservative financial policy this year,” he said, adding, “It seems that the stock market is overreacting, even though current conditions could lead to some decrease in the number of new orders.” Indeed, stock prices showed a sharp rally immediately after the two-day nosedive in early October.

Lotte E&C Builds Hyatt Regency Hotel in Mongol

In Mongolia, Lotte E&C concluded a Hyatt Regency Hotel construction contract with Mongolyn ALT Corpora-tion (MAK) on September 9. The contract covers the first phase of the entire construction processes. According to the deal, the hotel will be located in downtown Ulaanbaatar at a cost of US$110 million. The total floor area and site area measure 65,468m2 and 17,304m2, respectively. A total of 230 hotel rooms, service apartments and offices will be housed in the 200m-high building, which will feature 41 floors above ground and one underground. Construction is expected to be completed in three years.

MAK is a private mining company that owns three coal mines in Mong-olia,and which signed a franchise contract with Hyatt in order to step into the hotel business. It is planning to run the hotel from 2H of 2015. While seeking a reliable partner for its new business successful, MAK learned that Lotte had hotel construction experience in Korea and Moscow, Russia. The two parties began talks in May and entered into the agreement four months later.

During the first stage of the project, Lotte will be responsible for civil engineering, framework building and curtain walling. The company hopes its cooperation will provide it with an advantageous position during the second phase, which will cover facility, electrical, interior design and finishing work. MAK, for its part, intends to establish a headquarters building, tourist resort, staff training center and the like, which can serve a series of opportunities for Korean constructors.

Samsung C&T in the World’s Largest Combined Cycle Project in Saudi Arabia

In Saudi Arabia, Samsung C&T won the Saudi Electricity Company’s international public tender for the Qurayyah Combined Cycle Power Plant Project, and signed an engineering, procurement and construction (EPC) deal worth US$2.1 billion. It is the first for a Korean constructor to build a power station in the Middle East and run it as a power generation operator.

The Qurayyah Plants will have a combined capacity of 4,000MW, the largest of its kind worldwide, with construction costs expected to total US$2.85 billion. Samsung C&T will participate in the operation in the form of equity investment, as well as oversee all test runs.

Saudi Arabia is intending to build six independent power plants (IPPs) with a gross capacity of 20,000MW by 2018, with the Qurayyah Plants constituting the third project of the grand plan. It will be located on a 600,000m2-wide site approximately 100km south of Dammam, the biggest city in eastern Saudi Arabia.

Back in June, a consortium of Samsung C&T and ACWA, a local electricity generation company, was chosen as the preferred bidder for the 1,963MW-capacity plant in the region. During negotiations for the deal, the consortium proposed the construction of another station, leading to a deal for the construction of two stations.

Building on this accomplishment, Samsung C&T has earned the title of this year’s biggest winner of overseas construction orders among the top five Korean constructors. According to the Construction Association of Korea, Samsung C&T won deals worth a total US$3 billion in September alone, and has marked US$4.5 billion for 2011, already surpassing its own record of US$4.3 billion set in 2010.

Hyundai Engineering Leads BMS Oil Field Development Project in Algeria

Hyundai Engineering concluded an EPC contract for oil field development in Bir El Msana, Algeria. During the course of the US$158 million-worth project, which includes a dry run of the installation, Hyundai will create petroleum production facilities and pipe lines, which will collect 13,200 barrels of oil a day from three wells.

The company has performed excellently around the world and made use of its rich project management experience and technological strength to beat global leaders such as ABB and JGC. Curr-ently, it is engaged in various plant and social overhead capital (SOC) construction projects in Equatorial Guinea, Nigeria, Madagascar, Tunisia and other African regions.

Traditionally, European players have been prevailing in the North African construction market due to its geographical proximity. As such, Hyundai’s recent achievements are especially praiseworthy. These achievements include the construction of an oil refinery in Algeria and a phosphoric acid manufacturing plant in Tunisia, not to mention the project to begin in Bir El Msana.

The company is also standing out in Turkmenistan. Last year, it won a desulfurization plant construction deal worth US$1.48 billion there, the biggest single construction project in the Central Asian nation’s history. Building on this, Hyundai was selected this year to construct the Kandym Gas Processing Plant in Uzbekistan, in which US$238 million is being invested. The company is also preparing to establish a gas chemical plant worth US$692 million in the country, as well as a substation worth US$100 million in Kazakhstan, thus increasing its presence in the natural resources-rich Central Asian area.