Spiralling costs fuel inflation

High raw material prices put pressure on various industries

(The Star) – Inflation is rearing its ugly head globally and like it or not, Malaysia is not spared.

Those who are planning for a New Year party would probably find that they are going to bust their initial budget because prices, especially food, have gone up substantially.

Higher selling prices, however, do not necessarily translate into higher earnings for manufacturers, whose profit margins are indeed being squeezed by rising raw material costs.

Federation of Malaysian Manufacturers president Tan Sri Yong Poh Kon said the manufacturing sector had been exposed to tremendous inflationary pressure in the past 12 months, chiefly from spiralling commodities prices.

“The rise in the price of commodities like metals and palm oil will affect individual companies directly. In addition, we have higher fuel costs, which would generally affect the industry,” he told StarBiz.

Foodstuff manufacturers are already feeling the bite of rising raw material costs.

Nestle (M) Bhd and Dutch Lady Milk Industries Bhd have voiced their concerns over escalating raw material costs at the release of their third-quarter results last month.

The two companies expect the adverse impact of such costs on the price of foodstuff to be even more pronounced next year.

Even the manufacturers of basic metal, plastic products and auto parts, and construction companies, which are reeling from higher steel prices, are also feeling the pinch of higher costs.

“We are having cost-push inflation, which is driven by higher production costs instead of demand. It started when crude oil prices began to climb in 2004,” said RAM Holdings Bhd group chief economist Dr Yeah Kim Leng.

He said the cost-push inflation was caused by the imbalance between supply and demand as a result of growing consumption of commodities in the highly populated emerging economies, namely China and India.

“If demand is inelastic (meaning consumption is less sensitive to price), manufacturers would be able to pass on their costs to consumers.

“If demand is elastic, the producers will have to bear at least part of the cost increment,” Yeah added.

FMM's Yong said the authorities should not restrict manufacturers from raising prices.

“The best way to contain prices is to have a more competitive environment whereby we minimise any artificial constraints,” he said.

Yong said if manufacturers charged too high a price when import tariffs were low, it would make commercial sense for traders to import cheaper substitutes.

Eventually, he said, the price being offered in the market would be “fair in the absence of overly protective import duties.”

Cost-push inflation also poses a threat to the effectiveness of the Government's policy of stimulating the economy by increasing public spending.

“The flow-through economic impact from public projects will be offset by higher raw material costs,” MIMB Investment Bank equity research head Pong Teng Siew said.

Pong said the real value of the Government's budget would shrink due to inflationary pressure. “The budgeted amount could do less now because of higher prices.”

In view of the high price of commodities, Pong has recommended an overweight position on commodity or resource-based companies.

“The next two years will continue to be the years for commodities,'' he said. “We are not avoiding the manufacturing sector despite rising raw material costs.''

Pong said manufacturers that had the financial resources to stock up raw materials would be able to capitalise on that advantage.