Subsidy bill set to rise to control runaway commodity prices

  • Business
  • Monday, 14 Dec 2009

PETALING JAYA: Food and energy subsidies eat up a large chunk of the country’s annual operating budget, and critics argued that the tens of billions of ringgit spent every year to keep domestic prices steady have largely gone to waste.

Earlier this month, the Government said it would fork out RM720mil this year to subsidise the cost of sugar and keep domestic retail price at a fixed RM1.45 a kg.

At the same time, news reports showed a steady rise in sugar smuggling activities to neighbouring countries where sugar is sold at a higher price.

The price of the sweetener in the international market has gone up by at least 90% this year, to its highest in more than 20 years.

Sugar futures were traded at above US$620 per tonne in London last Friday. Analyst reports pointed to further increase next year as sugar supplies remained tight.

But the main beneficiary from the Government’s generous subsidy expenditure is the energy sector. Keeping the petrol subsidy at 30 sen per litre translates to about RM3bil a year.

The Government spends ten times that amount to subsidise fuel used to produce electricity and on cheap gas sold to local factories.

Talks about revamping the national subsidy structure is on the platter, but progress had been slow so far and the subsidy issue remained an expensive affair for all stakeholders.

Meanwhile, analysts are predicting commodity prices to continue rising next year unless a major crisis erupts and scuppers the global economic recovery.

The commodity financial investment market is expected to see a record US$50bil in capital inflows this year, according to JP Morgan global commodity research team.

In fact, the amount surpassed the combined investment flow figures recorded in the previous three years.

“Capital flows into commodities are at a record level this year, as investors pre-position against inflation risk,’’ JP Morgan said.

“Powered by high levels of global liquidity, commodity prices are expected to move sharply higher in the first half of 2010, led by base and precious metal,’’ it added.

Gold price broke record after record as it rose by more than 30% this year, and is predicted to reach US$1,400 an ounce next year. Copper, which has doubled its price after a pummelling in late 2008, is expected to hit US$8,000 a tonne before moderating in the second half of 2010.

High global liquidity and low cost of financing inventory have been crucial to the commodity market recovery this year.

“Noth only have they acted as a significant economic stimulus, but they have also helped the commodity markets carry surplus inventory – both for US dollar preservation and to express expectations of long-term demand growth in developing economies,’’ JP Morgan said.

It said there was no coincidence that commodity performance in recent months had shown direct relationship to the ease with which commodities can be stored.

“As a result, the path of commodity prices will be strongly linked to global liquidity and US dollar trends, and the ease of storage, which puts precious metals at the high end of risk from a setback, with natural gas and some agricultural commodities at the lower end of the spectrum,’’ it said.

Demand for physical inventories and buying of commodity assets are not entirely driven by commodity security and supply concerns, but also by the desire for capital preservation in the face of US dollar weakness and concern about future inflation.

While the commodity investment market is a legitimate tool to hedge risk and for price discovery, there are now genuine worries that the derivatives market had over the years become a huge private playing ground for greedy speculators.

In the United States, the legislative debate on the impact of financial investment on commodity prices first emerged last year. In the past months, lawmakers had been trying to balance the need to reign in Wall Street’s excessive speculative trades while at the same time keep exchanges competitive.

In terms of real developments, there were some success in trade transparency, with the September 2009 publication of the new Commodity Futures Trading Commission’s (CFTC) Commitment of Traders report that disclosed position data on an expanded list of users, including swaps dealers and managed money.

The United States is under huge international pressure to step up its financial reforms.

The US$450bil over-the-counter derivatives market is widely blamed for its role in amplifying the global financial crisis that erupted in 2008.

Last year, crude oil futures in the United States went up to as high as US$145 a barrel in July, before it plunged to a low of US$33 a barrel in December.

Reports had shown that a paper contract for a barrel of crude oil can change hands more than 30 times without actual shipment happening.

This unpredented volatility in the commodity market was a nightmare for policymakers across developing Asia, where most essential items like food and fuel are heavily subsidised.

It happened in 2008 and is likely to continue to haunt Malaysia next year.

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