How rising diesel prices from Iran conflict have slowed down a once-booming sector in Malaysia

JENJAROM, Selangor – At a factory construction site, two tractors were levelling the land before bitumen was poured to lay roads. This normally routine procedure has pushed up costs for Malaysian developer Ryan Lim since the spike in petrochemical product prices caused by the Iran war.

“I have had to put up an extra RM100,000 (S$32,400) for bitumen used in tarred road construction. For the five rented machines, the subcontractors no longer provide diesel,” Mr Lim, 46, told The Straits Times on May 7 at the site in Jenjarom, 50km south-west of Kuala Lumpur.

He now needs to prepare 3,000 litres of industrial diesel in May to fuel machine operations over four weeks, compared with 1,000 litres in February, which could sustain operations for six weeks at the time.

By his estimates, his profit margins for the whole project in Jenjarom are down RM1 million to RM2 million, as industrial diesel now costs RM7.30 per litre in May, more than double the February price at RM3.50 per litre.

Industrial diesel costs more than pump prices because it is delivered directly to worksites in bulk – bypassing petrol station purchase limits that the government imposed to curb subsidised diesel smuggling.

The value of work done in Malaysia’s construction sector increased from RM112 billion in 2021 to RM178.6 billion in 2025, with the 2025 value being 12.5 per cent higher than the previous year.

But the diesel price hike has hit Malaysia’s construction sector hard, forcing some contractors to halt work as rising costs have made projects no longer profitable.

Penang-based developer Jerry Chan said there have been delays in earthwork, where diesel accounts for a large portion of machinery and transportation expenses.

“Cases have been reported in Penang where contractors refuse to proceed until price adjustments are made. Obviously, this will impact completion,” Datuk Seri Chan, who is the executive chairman of Asas Dunia Berhad, told ST.

Contractors who are not adequately reimbursed by developers may be forced to halt projects as production costs exceed revenue, veteran developer Looi Hei Tyng explained.

“Contractors involved in housing projects that take 10 to 12 months are the most vulnerable,” said Datuk Looi, who is also president of the Negeri Sembilan Chinese Chamber of Commerce and Industry.

A Johor-based contractor who wants to be known only as Mr Kong said that developers have even delayed awarding tenders for two major drainage and sewage system projects in the hope that diesel prices will return to pre-Iran war levels.

“Take one project as an example: I was supposed to start work in May. But the quotation I gave in March is no longer sustainable because the cost of raw materials, including diesel, has increased by more than 15 per cent,” said Mr Kong, who owns four diesel-powered machines.

Two developers were willing to absorb the increase in diesel prices, enabling Mr Kong to continue the work.

Excluded from subsidy

Like the construction sector, the tourism and plantation sectors are also excluded from the government’s diesel subsidy list, and hence are also affected by higher diesel costs.

Since June 2024, Malaysia has floated diesel prices in Peninsular Malaysia in line with market rates by ending blanket subsidies. Meanwhile, subsidies are still available for diesel in Sabah and Sarawak because of the states’ lower income levels and their higher dependency on diesel for power generation and logistics.

Instead, the government introduced targeted subsidies for public transport, eligible logistics operators and the agriculture sector, offering diesel at a discounted price of between RM1.85 and RM2.15 per litre.

However, the Iran war has pushed Malaysia’s diesel pump price up from RM3.12 per litre on March 5, peaking at RM6.72 on April 9 before falling to RM5.17 on May 7.

Since industrial diesel is pricier than pump price by RM1 to RM2 per litre, Second Finance Minister Amir Hamzah Azizan has warned businesses in April not to “take advantage of government-absorbed subsidies” at the pumps.

The situation is worsened by a global supply crunch that shows no sign of abating. The oil flow from the Strait of Hormuz, mostly bound for Asia, is estimated at between 20.7 million and 20.9 million barrels per day, according to Lloyd’s List Intelligence. Malaysia’s Finance Ministry has stated that 38 per cent of its crude oil imports pass through the strait.

The top three crude oil suppliers in 2025 were the Gulf countries: Saudi Arabia (33.3 per cent), the United Arab Emirates (20.6 per cent) and Oman (9 per cent). The oil is then refined domestically for local petrol and diesel consumption.

While some lorry operators are cushioned by diesel subsidies, Johor Trucking Association president Chai Pei Yoon said logistics costs for construction materials within the state and exports to Singapore have risen by up to 15 per cent as a result of manpower shortage and a rise in maintenance costs.

“We are more concerned about potential diesel supply shortages as we do not know when the Strait of Hormuz will reopen for oil transportation,” she told ST.

Weeks to clear backlog

Even in the best-case scenario, where Iran and the US conclude a final deal and regional energy assets resume production, the ship backlog would take “at least several weeks to clear” and energy supply would not resume immediately, said maritime analyst Cichen Shen.

“Currently, there are 2,000 to 3,000 ships – including 600 large merchant vessels above 10,000 deadweight tonnes – stranded in the Strait of Hormuz,” the Lloyd’s List Intelligence Asia Pacific editor told a forum in Kuala Lumpur on April 28.

Economist Nungsari Ahmad Radhi agreed that the shortage of crude oil, which is essential for diesel and other associated petrochemical products, is a major challenge for Malaysia’s industry.

“The cost impact has been muted because the government subsidises petrol and diesel. Households don’t feel it, but businesses are already experiencing supply shortages,” said Dr Nungsari, who is also the chairman of think-tank Khazanah Research Institute.

“These constraints, along with the inevitable rise in subsidised prices, will push inflation higher as part of the adjustment,” he added.

Economist Barjoyai Bardai said the diesel price shock has created a ripple effect across all sectors of the economy, as businesses pass fuel-related cost increases on to consumers.

“The diesel-intensive construction sector would be significantly impacted by the higher cost of operating excavators, cranes and trucks. There is also the potential for project delays or renegotiations of contract prices, while some government infrastructure budgets may need revision,” Dr Barjoyai of Al-Madinah International University told ST.

To cushion the impact on the construction sector, Mr Looi proposed that the government help ease cash flow problems for affected contractors by reducing advance tax estimate payments.

Mr Lee Heng Guie, executive director of Socio-Economic Research Centre, said that unused subsidised diesel quotas could be reallocated to economic sectors in need.

“Not all allocated diesel quotas are fully utilised. These could be optimised for sectors that are affected,” he told ST.