| Written by Sharon Tan & Chua Sue-Ann | ||||||
| Edge Financial Daily, 01 June 2011 14:03 | ||||||
| The worst hit industries include those in the steel, oil and gas, food processing, cement and electronics and electrical sectors. In a note yesterday, Maybank IB Research opined that the tariff increase was fair and manageable for commercial and industrial customers given that Tenaga Nasional Bhd’s (TNB) tariffs remain competitive compared with regional rates. Maybank IB Research noted that the tariff hike was more subdued this round compared to that in July 2008, where natural gas price jumped 111% to 135% and electricity tariffs rose 24%. It added that the gradual RM3 per mmbtu rise in natural gas every six months would allow commercial and industrial users to plan ahead. In announcing the tariff hike, the government explained that 75% of consumers would be shielded from the direct brunt of the rise in rates. However, increasing margin pressures are expected to force manufacturers to pass rising costs to end-users, which would further drive up the cost of goods. Apart from the direct impact on companies’ earnings, HwangDBS Vickers Research noted that the decision to increase electricity tariffs and gas prices may also translate into higher inflationary pressures as the multiplier effect works its way through the economic chain. The research house expected a reassessment of the timing of a potential snap general election, initially rumoured to be held this year, to allow time for the public to adjust to the higher cost of living. The Edge Financial Daily spoke to industry players in the affected sectors to find out the impact of the electricity and gas price increases and their strategies to grapple with the rising cost pressures. Rubber gloves According to CIMB Research, higher energy costs are negative for the rubber glove sector given that electricity accounts for 2% to 4% of total costs while natural gas makes up between 3% and 9% of total operating costs. “Glovemakers that are already battling with higher input costs, a weaker US dollar and weak demand now have to squeeze out further operating efficiencies to offset the higher energy costs,” the research house said. As for Maybank IB Research, the average 7% hike in electricity tariffs and 20% rise in industrial gas price could result in a 1% to 2% increase in glovemakers’ total production costs. “In our view, an immediate average selling price adjustment in response to the higher energy costs is not likely as glovemakers also face mild over-capacity, a weaker US dollar and higher raw material (NBR) cost,” the research house said.
It opined that glovemakers should still have the pricing power to fully pass on the higher costs but producers’ competitiveness could be impacted in the longer term by rising energy and raw material costs. Company remarks Top Glove Bhd chairman Tan Sri Lim Wee Chai The overall impact of natural gas and electricity price increases is less than 1% of our total manufacturing costs. Top Glove started using biomass in 2005 to avoid depending entirely on natural gas. Currently, around 60% of the heat energy comes from natural gas as we have turned to biomass. Our new factories will no longer use natural gas. More research and development will be conducted on our production process to find ways to minimise energy costs. We will feel the short-term impact as we are unable to make any adjustment to the selling price some of the orders we have sold forward. This is because of the short short notice [less than two days] of the tariff increase. We hope the government will provide sufficient advance notice should there be any future price revision. We will have to pass on the additional costs to consumers just as we have done in the past. We will review the costing to factor in the current latex price and exchange rates in deciding how much to revise our prices. The price revision will be reflected in all new orders received from June 1 onwards. Steel The steel industry is expected to feel the impact of rising power prices given its intensive use of energy with electricity and gas contributing almost 10% of total production costs. Maybank IB Research anticipated that near-term margins for steel could be hit and local steelmakers would not be able to easily pass on additional costs as average selling prices are subject to international pricing. Company remarks Malaysia Steel Works (KL) Bhd CEO and managing director Datuk Seri Tai Hean Leng The degree of impact of the electricity tariff hike on steel players is largely dependent on three factors — size of the steel plant, process equipment and raw material used. The larger the steel plant, the higher the quantum of electricity cost. Steel plants with specialised equipment or with direct access to large quantities of alternative fuel such as oxygen can help reduce the impact of higher electricity tariffs. Adjustments to the steelmaking process and grades of raw material used can also cushion the effects of higher tariffs. In the case of Masteel, the new tariff will increase its electricity cost by approximately 10.5%. Masteel believes it will be able to partially reduce its electricity cost by making adjustments to the three factors mentioned and partially pass the remaining cost to its customers. Masteel’s strategy is to deploy the appropriate equipment to use alternative fuels to supplement the usage of electricity in steelmaking. Company remarks Ann Joo Resources Bhd group managing director Datuk Lim Hong Thye The natural gas price increase has an insignificant direct impact on Ann Joo as it is not a substantial cost component. As for our electric-arc-furnace operator, electricity is the second largest cost component, accounting for 8% to 10% of total costs for billet production. In anticipating future hikes in energy price, Ann Joo embarked on a blast furnace project in 2008. The blast furnace, used for iron and steel production via hot metal charging, ultimately reduces electricity and natural gas consumption. We are currently at the hot commissioning stage of the blast furnace project, the first blast furnace in Malaysia. We expect to reduce up to 40% of our electricity consumption per tonne of steel with the hot metal charging technology. In addition, the blast furnace off gas will be used to replace the natural gas that is currently used in the rolling mill operation. Real estate and housing The burgeoning real estate and property market is likely to feel the heat of higher costs, particularly if the cement and steel sectors begin to pass on rising costs to end-users. For the cement sector, Maybank IB Research said it may have to bear the brunt of the adjustments to gas and electricity prices at least for the next six months with cement prices rising about 7% last month. Company remarks Real Estate and Housing Developers’ Association Malaysia (Rehda) president Datuk Seri Michael Yam In the short term, developers are obliged to maintain their pricing for ongoing projects which have had their prices locked in already. Unsold units of ongoing projects would still be sold according to the launch price. However in the long term, property prices could trend higher as contractors and suppliers pass on additional costs. The dilemma is often about whether to launch property projects prior to starting the tendering process or vice versa. Steel and cement prices are volatile and very often, tender prices are higher than the pre-contract estimates. Consumers can expect property prices to rise not more than 5%, although it is difficult to gauge as there are many factors to consider such as price increases in steel, cement and other raw and finished materials such as tiles. The property market will still be alright for this year. Next year when the price increases start to feed through, it will be interesting to see if there are salary adjustments. If salaries are adjusted accordingly, then maybe we will not feel the impact so much. |
Friday, June 3, 2011
Industries grapple with rising power bills
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