Higher oil prices to raise construction costs

KUCHING (March 13): Higher oil prices caused by escalating geopolitical tensions are expected to raise construction costs through higher diesel and building material prices, especially cement and bitumen.

In a construction sector update, Maybank Investment Bank Bhd (Maybank Research) guided that diesel prices typically rise alongside oil prices, which increases the cost transporting building materials as well as cost of construction as construction machinery relies heavily on diesel.

“As Malaysian construction companies generally pay market diesel prices, higher fuel costs may compress construction margins,” said the analyst.

Note that diesel prices have already increased by 26 per cent to RM3.92 per litre since the start of the conflict at the end of Feb.

Meanwhile, while oil is not a direct input for most building materials, it affects the broader supply chain that supports the construction industry.

Maybank Research added that bitumen which is mainly used in road construction may see some pressure as it is closely tied to oil prices being a direct petroleum derivative, while cement will likely see moderate pressure via higher thermal coal prices which cement production relies mainly on.

Steel on the other hand, is expected to be largely insulated as coking coal which is essential in steel production is unlikely to face sharp cost increases due to weak global demand.

Overall, Maybank Research believes that the current oil spike may cause moderate rather than severe building materials inflation as seen during the 2022 Russian-Ukraine war.

They note that current thermal cola prices still remain far below the extreme levels seen during the 2022 Russian-Ukraine war, suggesting limited pressure on cement prices.

That said, for cement producer, Chaya Mata Sarawak Bhd (CMS), Maybank Research believes that it still faces some risk from the higher thermal coal prices but reckons that it is not too concerning given its dominant position in Sarawak that will allow them to adjust cement prices if necessary.

Meanwhile, players like Prolintas Infra Business Trust (Prolintas) may see tighter development costs due to bitumen prices but the impact on earnings is expected to be small.

Gamuda Bhd (Gamuda) on the other hand, is relatively protected as most of its projects are structured on cost-plus terms, allowing it to pass higher building material costs to clients.

“Overall, the sector faces moderate cost risks but limited downside to earnings forecasts under current conditions,” said the analyst who maintains a ‘positive’ call on the construction sector.