Material cost hikes could cut construction margins by up to 2.4 points: CGS

Fixed-price contracts are leaving subcontractors to absorb initial cost spikes.

Higher fuel prices linked to Middle East tensions are feeding through to raw materials and logistics, increasing cost pressures across the construction and materials sector, according to a report by CGS International.

“Given that Singapore imports all its raw materials, higher inward freight cost is indirectly reflected in the cost of raw materials,” it said.

The brokerage firm expects that a 5% increase in raw material costs could reduce net profit margins by between 0.1 and 2.4 percentage points if companies are unable to pass on the higher costs.

Separately, DBS said the construction industry is entering a multi-decade growth cycle, supported by infrastructure projects and housing demand.

Total construction demand is projected to reach $47b to $53b in 2026, broadly in line with the preliminary $50.5b in 2025, Building and Construction Authority data showed.

However, rising fuel and material costs are weighing on project profitability, particularly for fixed-price contracts.

For instance, contractors cannot easily raise prices under fixed-price projects, leaving subcontractors to absorb initial cost increases before renegotiations.

“We think construction players with thinner margins could ask for renegotiations to share the higher raw material costs,” it added.

‘Banks benefit’

At the same time, rising inflation is reshaping financial conditions in a way that supports banks.

“Bond yields have risen as conflicts in the Middle East create uncertainties over the outlook for inflation,” according to a report from UOB Kay Hian, adding that the US Federal Reserve is now expected to keep rates steady at 3.5% in 2026.

The firm noted that higher yields are broadly positive for banks, particularly as investors and high-net-worth individuals seek stability in asset protection.

“Banks are attractive yield plays given the current low-interest rate environment in Singapore,” it said. “The sustainability of their dividend payout is supported by resilient earnings, strong capital adequacy and discipline in capital management.”

Moreover, heightened geopolitical uncertainty has reinforced Singapore’s safe-haven appeal, driving deposit growth and wealth inflows into local banks, particularly from Middle East investors shifting assets from riskier markets such as Dubai.

A separate report by Maybank IBG Research said its ‘safe’ reputation is expected to cushion the impact on corporate earnings in the first half of the year, with banks, non-bank financial institutions, REITs and tech manufacturing likely to benefit.

“These inflows support balance-sheet liquidity and fee-based income, especially in private banking and trading activities amid increased market volatility,” UOB added.