100 days into Iran war: How rising costs are hitting consumers and businesses in Southeast Asia

SINGAPORE: More than three months into the war on Iran, the aftershocks from disrupted Middle Eastern energy and shipping routes are being felt far beyond the oil market, from road construction sites in Malaysia to food and beverage operators in Indonesia.

The conflict has disrupted trade through the Strait of Hormuz - a vital chokepoint for oil and gas supplies heading to Asia - driving up costs of not only fuel and petroleum-based materials, but also less obvious goods, across the region.

For Malaysian contractor Sukumar Subrayalu, founder and managing director of Sugu Construction, the impact has been profound.

The price of bitumen - a key material used in road and pavement works - has surged some 70 per cent from around RM1,700 (US$430) to nearly RM2,900 per tonne, while diesel prices have jumped by more than 80 per cent, he told CNA.

Suppliers are revising prices at short notice, squeezing contractors already locked into fixed-price agreements, Sukumar added.

“At this stage, the industry is facing more of a price volatility issue rather than a complete supply shortage,” he said.

“While supply is still available, contractors are facing challenges in budgeting and cost forecasting because prices can change within a short period of time.”

Across Southeast Asia, businesses are grappling with similar pressures as disruptions linked to the conflict have rippled through global supply chains.

From plastic packaging and helium supplies to fertiliser and food production, industries reliant on petroleum-based materials are facing sharp price swings, forcing firms to raise prices, absorb losses or rethink operations altogether.

As the Iran war which began on Feb 28 marks its 100th day on Monday (Jun 8), its repercussions are being felt in everyday life across Southeast Asia, with governments and consumers having to brace for higher costs of building roads, milk packaging and even filling party balloons among others.

Experts and industry players warn that the disruptions are likely to persist beyond the next six months, even if tensions ease, describing the impact as a long-term “structural shock” to regional supply chains and production costs.

FROM ROADS TO RESIN AND HELIUM

Malaysia’s Deputy Works Minister Ahmad Maslan said in April that a third - or 280 of 855 - road construction and maintenance projects across the country had experienced delays due to rising construction material and diesel costs.

That number is expected to increase if cost pressures continue, he warned, as reported by Malaysian news outlet Malay Mail.

To cope, contractors are absorbing part of the higher costs to avoid project stoppages or contractual disputes, particularly for government projects, said Sukumar.

“Some firms are slowing down work sequences, operating fewer machines, extending construction schedules and prioritising critical activities only,” he added.

As bitumen is petroleum-based, fluctuations in global oil prices and supply chain disruptions have a direct impact on material costs. Bitumen typically makes up about 4 to 7 per cent of the premix used in pavement works, said Sukumar.

He noted that as most construction projects are awarded under fixed-price contracts, contractors are unable to pass on the higher bitumen costs, putting pressure on profit margins, cash flow and overall project viability.

“In certain cases, contractors have also engaged in discussions and negotiations with project owners, clients, suppliers and subcontractors to mitigate the impact, including requests for price adjustments, extension of time, alternative material sourcing or revision of project implementation schedules.”

Sukumar, who is also a council member of the Master Builders Association Malaysia, said construction companies in Malaysia are tightening operational efficiency by reducing wastage, consolidating deliveries and using existing material stock before placing new orders.

Similarly in Thailand, the Thai Contractors Association has warned of a potential wave of abandoned projects and site closures as diesel, steel and freight costs reached “unsustainable levels”, reported The Nation.

“Many private (project) owners are opportunistically ignoring the reality of the market … Without a price escalation clause in these contracts, the contractor is expected to absorb 100 per cent of the risk,” association president Liza Ngamtrakulpanit told The Nation.

The disruptions are also rippling through Southeast Asia’s plastics industry, which depends on naphtha imported from the Middle East.

Naphtha, a petrochemical derived from crude oil, is widely used in the production of plastics found in everything from food packaging to personal protective equipment.

In Indonesia, entrepreneurs have even taken to social media, with parody TikTok videos showing products wrapped in banana leaves instead of plastic, jokingly calling it their “solution to rising plastic prices”.

Indonesia’s Industry Ministry said firms have also begun diversifying packaging materials, turning to paper, glass, metal and recycled plastics, reported the Jakarta Post.

The Malaysian Plastic Manufacturers Association (MPMA) told CNA that prices of polyethylene and polypropylene, both derived from naphtha, jumped by about 90 per cent in April, from around US$930 to US$1,700 per tonne.

“There are also severe shortages in the market for certain grades and some buyers can no longer buy from usual suppliers because local suppliers have declared force majeure, while others are limping,” said MPMA’s president CC Cheah.

Prices have since retreated from their peak, averaging about US$1,450 per tonne for common grades in June, according to MPMA.

The association said supply pressures began to ease in May as manufacturers turned to alternative international sources, particularly imports from China.

Meanwhile, Malaysia’s largest homegrown dairy company Farm Fresh told CNA that the price of resin used for packaging has doubled from RM4 to about RM8 to RM9 per kg, prompting the company to shift towards paper cartons for its products.

Similarly in Indonesia, the Nusantara Bottled Water Companies Association (AMDATARA) said plastic raw material prices have risen by an average of 45 to 70 per cent since new contracts were signed in March, with polypropylene resin prices surging by as much as 90 to 100 per cent compared to February.

The increase has pushed up the cost of finished packaging products such as bottles, gallon containers, caps, labels and shrink wrap by about 28 to 48 per cent depending on volume and material type, AMDATARA chairman Karyanto Wibowo told CNA.

“Some medium-sized factories and small- and medium-sized enterprises are already experiencing delivery delays of two to three weeks. The situation remains dynamic, with prices continuing to rise every seven to 10 days,” he told CNA.

As a result of the increase in raw materials prices, bottled water prices could rise more than 15 per cent gradually if there is no intervention.

“Most businesses have already begun passing on part of these increases to consumers through retail price adjustments particularly for 600ml bottles and 19 litre gallon containers,” said Karyanto.

The shortages are also spilling into the automotive sector, noted several companies in Indonesia, where manufacturers rely heavily on plastics for vehicle manufacturing, from interior components such as dashboards and door panels to parts in the engine compartment, reported Jakarta Post.

Beyond plastics, the conflict has also tightened global helium supplies.

Helium is a finite resource typically extracted as a by-product of natural gas production.

Major producers include the United States and Qatar, with the latter accounting for about a third of global supply.

Besides being widely used in semiconductor manufacturing, it is also used in advanced chip production as well as in some magnetic resonance imaging (MRI) machines that detect tumours and injuries to muscles or ligaments.

CNA reported previously that the global helium shortage has not immediately affected Singapore’s semiconductor manufacturing and healthcare operations, but a prolonged disruption could push prices up, according to industry players.

Meanwhile in Malaysia, Investment, Trade and Industry Minister Johari Abdul Ghani said in May that local companies sourcing helium from the Middle East were experiencing a supply shortfall of around 20 per cent due to the war.

This has yet to pose a serious threat to the semiconductor industry, he added, as reported by the New Straits Times.

However, the helium shortage has pushed prices higher for party and event businesses in the region.

Some businesses in Singapore said helium prices have surged by as much as 40 per cent, while Yogyakarta-based party supplier Balloons of Happiness said supplies have become “harder to secure”.

“Besides offering decorations without helium, we are also managing helium usage more carefully now,” the company told CNA.

IMPACT ON FOOD SECURITY

Industrial disruptions as a result of the blockade in the Strait of Hormuz are also feeding into Southeast Asia food systems, raising concerns over affordability and food security, say businesses and industry players.

Henry Saragih, chairman of Indonesian Farmers Union, said soaring prices of non-subsidised fertilisers such as urea, which is the most widely used fertiliser globally, have contributed to about a 5 per cent increase in production costs.

Southeast Asia imports over US$1.1 billion worth of fertiliser from the Middle East - or about 11 per cent of the region’s total fertiliser imports - according to a report published by the S. Rajaratnam School of International Studies (RSIS) in March.

Henry described the situation as an “economic checkmate” for small farmers, as rising fertiliser prices together with increased diesel costs have significantly increased transportation expenses and the operating costs of agricultural machinery, such as tractors and milling machines.

“These have clearly affected production expenses while simultaneously reducing farmers’ and livestock breeders’ income potential,” he told CNA.

“Production costs have increased by 20 to 30 per cent (in total) while the selling prices of rice grain or other commodities at the farm level often remain stagnant or do not increase proportionally with capital costs.”

Some farmers in Indonesia are now shifting towards natural fertilisers, while others are moving away from staple food crops such as rice towards horticultural crops that can generate faster returns.

Jose Ma Luis P Montesclaros, a research fellow at the Centre of Non-Traditional Security Studies in RSIS, told CNA that fertiliser supply disruptions could push up staple food prices in various ways: Farmers may reduce fertiliser use because of higher costs, lowering crop yields and food supply, or they may continue using fertilisers but pass the higher costs on to consumers.

“Another consideration is whether countries are providing their own farmers or consumers, with some forms of subsidy amid the period of higher fertiliser prices … As fertiliser prices have risen significantly, not all countries may be able to afford larger fertiliser subsidy bills,” Montesclaros said.

Further down the line, some food and beverage operators have also begun passing on costs to consumers.

Fuad Syukron, owner of Doughmad Gourmet Donuts in East Java, said he has raised prices from 3,500 rupiah (US$0.20) to 4,000 rupiah per donut, an increase of about 14 per cent.

“We started to feel an increase in raw material costs since the end of February, although the surge was not as significant as it was in April, where it has become difficult to absorb in terms of the cost of goods sold,” Fuad said.

The price of plastic packaging, for instance, has increased by around 67 per cent, he noted.

“Our main concern is that people’s purchasing power will decline which could lead to a drop in our revenue.”

Consumers are also already feeling the squeeze.

Malaysian consumer Falah Hamidi noticed in April that there has been a disruption in the availability of milk, especially local dairy brand Farm Fresh, as packaging suppliers cut volumes amid higher resin prices.

“Usually the shelves are full every day of the week but now it is unpredictable … It ranges from normal availability, to a few bottles available to being completely out of stock,” Falah, who is the co-founder of a food surplus rescue app ReMeal, told CNA.

Farm Fresh Group Chief Financial Officer Mohd Khairul Mat Hassan told CNA that the firm was not ruling out raising prices, as plastic costs, which make up about 3 per cent of total production costs, had doubled.

Consumers elsewhere in the region are also beginning to notice rising everyday costs.

In Batam, 24-year-old graphic designer Marsya Adya Tami said prices of plastic products, eggs and drinks and local coffee shops have increased in recent months.

“I used to buy a pack of 10 eggs at Indomaret for around 21,000 to 23,000 rupiah but recently, the price has reached about 25,000 rupiah,” she told CNA.

“Nowadays, many coffee shops start selling drinks from around 30,000 rupiah whereas about one year ago, a cup of coffee could still be easily bought for around 20,000 rupiah,” she added.

Beyond consumer goods, disruptions are also spreading into sectors such as healthcare.

In Singapore, local distributors of medical equipment like Medpro Medical Supplies say they have increased inventory levels in anticipation of stronger demand as customers are buying more items as backup stock.

In Malaysia, Health Minister Dzulkefly Ahmad estimated that the cost of some medicines and medical devices had increased around 30 to 40 per cent, due to higher input costs linked to the Middle East conflict, reported local news outlet The Star.

Both the Malaysia and Singapore governments have said that medical supplies remain stable.

WHY EXPERTS SAY THE PAIN MAY LAST

Experts and industry players warn that the fallout from disruptions to global feedstock supplies is likely to persist beyond the next six months even if tensions ease, with some expecting it to last over the next one or two years.

“Recovery is expected to take much longer … (this is) no longer a ‘normal fluctuation’ but a structural shift that is forcing the entire bottled water and petrochemical supply chain to adjust over the medium to long term,” said Karyanto of Jakarta-based bottled water companies association Amdatara.

Economist Jayant Menon, a visiting senior fellow at Singapore’s ISEAS - Yusof Ishak Institute, said higher shipping and insurance costs are likely to remain sticky, while depleted supplies of oil and other petrochemicals will take a long time to return to pre-conflict levels.

He also noted that some effects of the conflict could become “irreversible”, as households pushed into poverty and businesses forced to shut down may not recover even after tensions ease.

“The conflict may have lasted long enough to have shifted the trend growth of gross domestic product (GDP) in the short to medium term, with permanent impact on various social indicators, including poverty and inequality.” he told CNA.

Bhima Yudhistira, executive director of the Centre of Economic and Law Studies (CELIOS) in Indonesia, warned that inflationary pressures could intensify once governments are no longer able to sustain fiscal buffers, while companies reducing production capacity could also increase the risk of layoffs and unemployment.

Meanwhile, Montesclaros of RSIS said that many governments are still “building up fiscal buffers” following the COVID-19 pandemic and earlier food inflation shocks linked to the Russia-Ukraine war, which can prevent them from providing needed subsidies to support farmers and consumers.

Experts and industry players also said the crisis has highlighted Southeast Asia’s heavy dependence on imported raw materials and energy supplies linked to the Middle East, prompting calls for greater supply diversification and resilience.

“The (petrochemical) industry still relies heavily on imported raw materials, with Indonesia importing most of its annual naphtha requirements and around 70 per cent of supply coming from the Middle East,” said Karyanto.

Menon said the crisis underscored the need to reduce “overdependence on a few countries supplying critical products” and hastening green transition to reduce reliance on fossil fuels and petrochemicals.

At the 48th ASEAN Summit in May, regional leaders proposed ideas such as a regional fuel stockpile and a standby mechanism for food security to cushion against the impacts of the Strait of Hormuz closure - and potentially similar incidents in the future that could strain crucial fuel and fertiliser supplies to the region.

But for businesses already dealing with rising costs and shrinking margins like Sukumar, the uncertainty is already reshaping decisions on the ground.

“Some contractors are becoming more cautious about taking on new projects due to uncertainty over future material prices,” he said.

Source: CNA/ia(as)