Mid-size construction companies in South Korea are struggling to stay afloat as they face rising raw materials costs and unsold apartment units.

According to an analysis by Maeil Business Newspaper of the first-quarter earnings of 35 of the 50 highly-evaluated construction companies that submitted their quarterly reports, 19, or more than half, saw their operating profit decline from a year ago.

Of them, 16 construction companies were those with ranks between 11 and 50 in terms of the government’s evaluation of construction capacity.

Shinsegae Engineering & Construction Co. and HJ Shipbuilding & Construction Co. swung to an operating loss in the first quarter.

The weak performance is due to the unsold apartment units.

Kumho Engineering & Construction Co. posted 5.1 billion won ($4 million) in operating profit in the first quarter, down 65.8 percent from the same period a year ago.

Kumho E&C has been struggling since last year due to unsold apartment units. The builder received only 136 subscriptions for the 499-unit “Kumho Eoulim The First” apartment complex in Okcheon, North Chungcheong Province.

Only 72 subscriptions were made for the 398-apartment complex in Ulsan.

A regional builder Seohan Engineering & Construction Co. based in Daegu has also seen two of its recent apartment complexes in Ulsan and Daegu fall short of sales.

Kye-ryong Construction Industrial Co. also started sales of its 136-unit complex “Elif Aewol” in Jeju but it was only able to sell 16 units.

Kye-ryong posted a 23.6 percent on-year decline in first-quarter operating profit.

Shinsegae E&C posted an operating loss of 10.9 billion won as it was not able to sell apartment units after completion.

Other factors include a rise in raw materials cost.

Shinsegae E&C saw the cost of goods sold to sales ratio rise to 97.9 percent in the first quarter, up 5.4 percent from a year ago. The largest driver behind the increase was the price of ready-mixed concrete, which accounts for about 36 percent of the entire raw materials cost.

The price rose to 84,500 won per cubic meter in the first quarter from 80,300 won in the fourth quarter last year. The cost of goods sold to sales ratio is the percentage of costs compared to the sales figure. Higher costs and a higher ratio mean lower profitability.

The industry’s consensus is that the impact of the raw materials price hike is more severe for mid-sized builders.

“It is not easy for mid-sized companies to negotiate prices because their order book is relatively small,“ said one official from a mid-sized company. ”Even if we join any public projects, rising cement and other materials prices will lead to bigger construction costs, which will, in turn, result in a drop in our operating profit,“ said another insider from a mid-sized constructor.

By Chung Seok-hwan and Chang Iou-chung

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]