Against a backdrop of continued oil price volatility and uncertainty in the Middle East, anticipated cost pressures in New Zealand’s construction industry are becoming a reality.
Fletcher Building has recently disclosed that prices for its plastic-related products could rise by as much as 36%. The company said its Iplex piping and insulation businesses were among the most affected. These products rely heavily on petrochemical feedstocks and are extremely sensitive to changes in energy prices.
Meanwhile, rising fuel costs are adding to the pressure. Figures show that Fletcher Building consumes approximately 36,000,000 litres of fuel annually, of which 94% is diesel. Without hedging, every 10 NZ cent increase in the price of diesel would add approximately NZ$3,400,000 to the group’s annual costs.
Large companies can absorb some of this impact through hedging, bulk purchasing and pricing mechanisms. But further down the supply chain, particularly for small and medium-sized builders, the effects of this round of increases tend to be more direct.
From rising material prices to costs spreading throughout the industry
Industry analysis from RNZ shows that uncertainty over energy supplies is triggering a broader round of cost increases. Oil and gas production capacity in the Middle East has been damaged, with some capacity falling by more than 20%, while recovery could take years.
A defining feature of construction is its heavy dependence on energy.
From plastics, steel and aluminium to brick firing and transport, virtually every key stage depends on energy. When upstream prices fluctuate, the effects quickly spread through multiple channels rather than remaining confined to a single material.
This transmission is already becoming apparent. Plastic building materials, including PVC and PE, are set for another round of price rises over the coming months. Some imported products have already risen by more than 20% because of higher freight and port charges.
Costs are rising, but prices are constrained
Kelvin Davidson notes that materials and labour each account for roughly half the cost of building a home. In the current economic environment, wages have not risen significantly, meaning upward pressure on material prices will not translate fully into a corresponding increase in final construction costs.
A more immediate constraint comes from the market itself.
With interest rates still uncertain and the labour market weakening, property demand has yet to recover fully. Developers and builders are finding it considerably harder to pass all their cost increases on to homebuyers.
A practical reality is therefore taking shape: upstream prices are rising, businesses in the middle are under pressure, and buyers at the end of the chain may be unwilling to pay.
Chinese builders: surviving the squeeze
Compared with major developers or listed companies, Chinese builders tend to focus on small and medium-sized projects and are more sensitive to cash flow and cost fluctuations. In the current environment, protecting their businesses has become a more immediate concern.
Market feedback suggests several responses are gradually emerging.
First, builders are adjusting how they quote. A growing number are shortening the validity period of their quotes, and some are adding material price adjustment clauses to contracts to avoid bearing the full risk of increases during a project.
Second, they are reconfiguring supply chains. Some builders are moving away from a single supply channel and using multiple suppliers to spread risk while responding more quickly to price changes.
Third, project selection is becoming more cautious. Amid growing uncertainty, many teams agree on prioritising projects with shorter timelines and faster cash returns. Some expensive, lengthy projects are being deferred or shelved.
Cost control is also extending into design. More builders are exploring ways to reduce costs through design improvements, alternative materials or changes to construction methods while maintaining compliance.
Who will bear these increases?
As things stand, this round of cost increases has become unavoidable, but there is still no clear answer as to who will ultimately bear them.
Will building material suppliers absorb them through economies of scale and internal mechanisms? Will builders cut their margins to keep projects moving? Or will homebuyers ultimately pay higher prices?
In the short term, the market has offered no clear path.
What is clear, however, is that with demand yet to pick up significantly, passing these costs along will be difficult, leaving the industry under sustained pressure.
Observations and reflections
Compared with previous cycles, when rising costs were accompanied by rising house prices, this round of changes appears more complex.
Costs are rising, but the market response has been weaker. This imbalance is effectively redistributing profit margins within the industry.
For builders, the real challenge may lie not simply in price rises themselves, but in making choices amid uncertainty.
Should they keep projects moving or slow down? Take on risk in pursuit of opportunities, or prioritise protecting cash flow?
At this stage, every decision could shape their position over the next two to three years.
Will this round of cost increases ultimately feed into house prices, or be absorbed within the industry? How would you respond in the current environment?