🚨 Exchange Rate Increase and Construction Material Cost Rise

Today Korean Economic News | 2025.01.20

📌 "Exchange Rate Increase, Rising Costs of Imported Materials like Rebar... Need to Strengthen Supply Chain Stability"

💬 The won-dollar exchange rate has reached its highest level in 15 years and 10 months, causing costs of imported rebar and plywood to rise, which is expected to negatively impact the construction industry. According to the Construction Industry Research Institute, the average exchange rate in December was 1434.4 won per dollar, the highest since the 2009 financial crisis. Strengthening supply chain stability has emerged as an urgent task.

1️⃣ Easy to Understand

The exchange rate has risen significantly, causing the prices of imported materials used in construction sites to increase accordingly. Let's understand this situation with an everyday example.

Let's imagine. Mr. Kim runs a bakery and uses imported flour and butter. Suddenly, the won's value drops, causing the dollar exchange rate to rise significantly. The imported flour that could previously be purchased for 100,000 won now costs 140,000 won, and butter prices have risen similarly. Mr. Kim faces two choices: raise bread prices or reduce profits. Neither is an easy decision.

Construction companies are in a similar situation. With the exchange rate rising to 1434.4 won per dollar, the highest level since the 2009 financial crisis, the costs of import-dependent materials such as rebar and plywood have surged. The price increase of these materials, essential for building apartments or office buildings, ultimately leads to increased construction costs.

The bigger problem is that this situation might not be temporary. Just as Mr. Kim's bakery might be able to handle a short-term rise in flour prices but could be at risk if it continues long-term, the construction industry also needs a strategy to prepare for sustained increases in material costs. This is why 'strengthening supply chain stability' is important.

2️⃣ Economic Terms

📕 Exchange Rate

Exchange rate refers to the ratio at which one country's currency is exchanged for another country's currency.

• A rise in the won-dollar exchange rate means more won is needed to buy one dollar.
• Exchange rates directly affect international trade, prices, and the profitability of import-export businesses.

📕 Supply Chain

Supply chain is a network of organizations, activities, information, and resources involved in all processes of delivering products or services from producer to consumer.

• It includes all processes from raw material procurement, production, and distribution to sales.
• Supply chain stability is an important factor that directly affects cost, quality, and delivery times.

📕 Import Dependency

Import dependency is an indicator that shows the degree to which a particular industry or economy depends on goods or services produced overseas.

• The higher the import dependency, the more vulnerable to fluctuations in exchange rates or international markets.
• Efforts to reduce import dependency are needed through expanding domestic production bases and developing alternative materials.

📕 Material Cost

Material cost refers to the expenditure on raw materials and components used in product manufacturing or construction projects.

• In the construction industry, it is an important cost element that accounts for a significant portion of total construction costs.
• Fluctuations in material costs directly affect construction cost estimation, contract terms, and profitability.

3️⃣ Principles and Economic Outlook

💡 Causes and Outlook of Exchange Rate Increase

• The phenomenon of the won-dollar exchange rate reaching its highest level in 15 years and 10 months is the result of multiple factors working together. First, the relative strength of the US economy and the Fed's tight monetary policy have led to a strong dollar. The US high interest rate policy has acted as a factor increasing the dollar's value by promoting capital inflow. Second, Korea's deteriorating current account has contributed to the weak won. A decrease in exports along with an increase in imports due to rising energy prices has reduced the current account surplus. Third, China's economic slowdown and increased geopolitical risks have also negatively affected emerging market currencies overall. The future exchange rate outlook may vary depending on several variables, but the US economy's soft landing, the Fed's interest rate policy direction, and the global trade environment will be key determining factors. Experts forecast that while exchange rate volatility will continue in the short term, it may gradually stabilize once the Fed's interest rate cut signals become more concrete. However, it should be noted that uncertainty factors such as the Trump administration's trade policies and Middle East instability still exist.

💡 Impact on the Construction Industry

• Exchange rate increases affect the construction industry through various channels. The most direct impact is the increase in imported material costs. With rising prices of heavily imported materials such as rebar, plywood, and gypsum board, overall construction costs are increasing. This becomes a factor pressuring the profitability of construction companies, which often use fixed contract methods. Also, the rise in material costs leads to pressure to increase sale prices or contract amounts, potentially increasing the burden on end consumers or clients. Especially in a stagnant housing pre-sale market, rising sale prices could increase the risk of unsold units, putting construction companies in a difficult position. Besides material costs, the prices of various input factors such as construction equipment and energy costs are also rising due to exchange rate effects. In this situation, construction companies are exploring various response strategies such as cost reduction, alternative material development, and contract method changes. However, due to industry characteristics, there are limitations to changing the cost structure in the short term, making fundamental improvements necessary from a medium to long-term perspective.

💡 Ways to Strengthen Supply Chain Stability

• Strengthening supply chain stability in the construction industry has become an even more important task in the current situation of increased exchange rate volatility. First, diversification of material procurement is necessary. It is important to reduce dependence on specific countries or suppliers and secure various sourcing channels. Second, strengthening domestic production bases should be considered. Increasing the domestic production ratio of key materials can reduce sensitivity to exchange rate fluctuations. Third, the use of preemptive material purchasing and hedging strategies. Price fixing through long-term contracts or exchange risk management using financial products may be effective. Fourth, securing supply chain visibility through digital technology. Through establishing real-time monitoring systems, material supply issues can be identified and addressed early. Fifth, the development of eco-friendly and alternative materials. As environmental regulations strengthen and ESG demands expand, the development of eco-friendly materials is becoming increasingly important in terms of cost reduction and risk management. At the government level, policy support for stabilizing construction material supply, regulatory easing, and expanded R&D investment are also needed. When these efforts are comprehensively made, the supply chain resilience of the construction industry can be enhanced.

4️⃣ In Conclusion

The sharp rise in the won-dollar exchange rate poses a significant challenge to the construction industry. Increased costs of imported materials lead to rising construction costs, which can result in deteriorating profitability for construction companies and upward pressure on housing prices. The highest exchange rate in 15 years suggests the possibility of structural change beyond a short-term phenomenon, making fundamental responses from the construction industry necessary.

In an international economic environment with increased exchange rate volatility, strengthening supply chain stability has become a necessity rather than an option. A multi-faceted approach is required, including diversification of material procurement, expansion of domestic production bases, strategic inventory management, utilization of digital technology, and development of eco-friendly alternative materials. This goes beyond simple cost management, becoming a key factor determining the sustainability and competitiveness of the construction industry.

Cooperation between the government and industry is also important. The government can help strengthen the industry's foundation through policy support for stabilizing the supply of key construction materials, regulatory improvements, and expanded R&D investment. Simultaneously, companies need to enhance their exchange risk management capabilities and strengthen internal systems for preemptively managing supply chain risks.

While the increase in material costs due to exchange rate rises is a burden on the construction industry in the short term, it can also be an opportunity for industry innovation in the long term. It can be taken as an opportunity to introduce new approaches such as digital construction technology, modular construction methods, and eco-friendly materials, and to improve global supply chain management capabilities.

There are also implications from consumer and investor perspectives. Consumers considering home purchases should consider the impact of rising material costs on sale prices, and investors in construction and related industries need to analyze differences in the impact of exchange rate fluctuations by company.

Ultimately, the rise in exchange rates and the resulting increase in material costs should be an opportunity to re-examine the entire value chain of the construction industry and build a more resilient and sustainable industrial ecosystem. Crises always come with opportunities. It is hoped that the Korean construction industry can take a step forward through this challenge.