Navigating Dire Straits

Deal or no deal

Even if there is an immediate deal and the Strait reopens – free of naval mines – tomorrow, the next Persian Gulf shipment will still take another two months to arrive on our shores. Meanwhile, the supply disruption is real, and higher input costs are here today, working through every part of our domestic supply chain.

Building costs are building

Given this supply chain disruption, there are clear signs of broad-based cost escalation for the construction sector ahead. Fuel prices have risen the most, partly offset by a temporary cut in fuel taxes. Other items – plastics, metals & chemicals – are also posting big price rises. All this adds to the input cost base in 2026.

A familiar tale of cost and caution

Oil price spikes are not new in history, and they follow a very well-trodden path. Indeed, oil prices and construction costs are tightly correlated, and likely to drive another round of inflation later this year. That said, given the oil price gains so far, we are looking at a milder shock in 2026, compared to 2022.

A margin squeeze for builders

For now, local builders are facing tighter profit margins from higher interest rates and higher costs. That said, builders are better positioned to manage this in 2026, following their experiences from the pandemic. Indeed, builders have moved away from bearing the full risks for cost escalations in fixed-price contracts.

Finding the right hedge

For investors, higher inflation and interest rates are adding layers of uncertainty and complexity to the outlook. Higher material costs and tighter builder margins will require more diligent surveillance of builder cash flows. Meanwhile, higher interest rates will weigh on equity returns, while boosting floating-rate credit returns.