Low commodities demand seen in the short term

An employee monitoring latex gloves on hand-shaped moulds moving along an automated production line at a Top Glove Corp factory in Setia Alam. The Malaysian rubber glove industry is envisaged to generate a higher export revenue of RM21.8bil this year. — Bloomberg

THE commodity-related industries in Malaysia are grappling with the coronavirus (Covid-19) turmoil that has led to the current depressed prices and gloomy export outlook in the coming months.

With most industries globally at a standstill given the lockdown measures on their operations, local industry players say demand for commodities such as palm oil, tin, steel and timber and their related products will remain low for at least the next three to six months.

This is with the exception of rubber glove, the sector that is booming from soaring demand since the Covid-19 pandemic started in December last year.

The local rubber glove industry is envisaged to generate a higher export revenue of RM21.8bil this year compared with RM18.7bil last year, says the Malaysian Rubber Glove Manufacturers Association (Margma).

Rubber glove is notably one of the essential preventive items used worldwide to combat the pandemic,

The global demand for rubber glove is projected to escalate to 350 billion pieces this year versus 290 billion pieces last year. On the flip side, it is not rosy for all in the local rubber sector.

Margma president Denis Low tells StarBizWeek the dry rubber segment has been severely affected by Covid-19 pandemic with the lockdown in most automobile businesses globally.

Dry rubber is the main raw material in the manufacture of tyres.

However, he expressed confidence that “once there is movement in the transportation sector, particularly in vehicles, then demand for dry rubber will return given the renewed buying interest”.

In 2019, Malaysia produced around 720,000 tonnes of rubber.

Of the total, the bulk of about 625,000 tonnes is dry rubber with the remaining 95,000 tonnes being latex, which is used mainly for rubber gloves, according to Margma.

Malaysia exported up to 75% of its dry rubber to China, Europe, Japan and South Korea.

With China starting to gradually open its doors for business, Low expects the recovery in the dry rubber segment to grow in the second half of this year.

“Once the related industries start to open for business, China will need to replenish its dry rubber inventories and will likely purchase more in terms of volume.

“China had stopped purchasing the commodity since the lockdown took place late last year, ” explains Low.

Also, in anticipation of the lockdown being lifted in some countries in the foreseeable future, Low expects rubber prices to rise by 10% to 15% from May onwards as users need to replenish their stocks.

“The prevailing rubber prices are not realistic and cannot be sustained in the medium to long term.

“Such prices are not encouraging to rubber planters and farmers as it is below the normal liveable income position.

“Hence, the rubber market must correct itself by 10% to 15% so that smallholders and planters’ income can be correctly sustained, ” explains Low.

Basically, producers and users are both of the view that a stable and steady market will be conducive as opposed to a volatile one that can be disruptive.

As of April 24, the tyre-grade standard Malaysian rubber (SMR 20) was traded at RM4.78 per kg while latex-in-bulk closed at RM4.18 per kg.

MIDF Research in its latest report has projected that global commodity prices will remain at moderate levels due to the supply glut and modest demand activities.

According to Malaysian Palm Oil Association (MPOA) CEO Datuk Nageeb Wahab, local production levels in the rubber and oil palm plantations were minimally impacted by the movement control order (MCO) as “these sectors were allowed to operate under the essential industries category”.

The MCO, which was implemented since March 18 in Malaysia, has affected food demand following the closing down of hospitality-related businesses on the back of rising production in local crude palm oil (CPO), he adds.

Nageeb notes that production of CPO has spiked by 25% this month compared with 1.39 million tonnes last month.

As such, subdued demand coupled with the expected rising production of CPO in the second half of this year could result in higher stockpiles by end-2020.

“The weak demand for CPO would also be impacted by the current cheaper soybean prices, which in turn will affect CPO prices, ” adds Nageeb.

He expects local palm oil stockpiles to be significantly higher by end-2020 compared to 2.01 million tonnes in December 2019.

Last month, Malaysia’s palm oil inventory rose to 1.73 million tonnes, its first increase after five straight months of declines as production exceeded total consumption.

For 2020, AllianceDBS Research forecast CPO prices to average around RM2,450 per tonne.

Meanwhile, one key commodity sector that was not allowed to operate during the first and second phases of the MCO is the local mining sector that is estimated at RM732bil.

It is worth noting that Malaysia is currently in the third phase of the MCO till April 28 which has been extended until May 12.

Malaysian Chamber of Mines executive director Muhamad Nor Muhamad expects the production volume and value of minerals in the country to fall this year compared with last year due to the slower economic growth, lower demand and low commodity prices.

In 2018, Malaysia’s domestic mineral production was down 14.01% valued at RM5.94bil from RM6.91bil a year earlier given lower production of minerals, according to Malaysian Minerals Yearbook 2018.

Malaysia’s mineral reserves consist tin, bauxite, copper, gold, iron ore, nickel and manganese.

“We have not made any calculations yet as to how much the production of minerals will fall in 2020.

“It will all depend on the duration of the MCO in Malaysia, ” says Muhamad Nor.

Given that countries worldwide are struggling with the Covid-19 outbreak, he predicts that demand for minerals would be lower this year resulting in sluggish mineral prices, with the exception for gold.

Citing Malaysia’s mining activities, he points out that mining companies would likely ramp up the production of minerals in the third quarter (3Q) this year, assuming that the MCO is lifted by June.

Despite the ramp-up of production slated in 3Q this year, Muhamad Nor says the loss of production volume of minerals during the MCO would not be offset by the rise in production.

With the International Monetary Fund forecasting global growth recovery next year, he expects the local mining sector to gradually recover in anticipation of the pent-up increase in the demand for minerals in 2021.

“The slow recovery in China will not be sufficient enough for demand to make a comeback this year because most of its production is exported to other countries.

“If other countries do not recover, then Malaysia’s mining sector will not be able to fully recover as well, ” he added.

For companies to recover the post-exit MCO, Muhamad Nor says many big players will be looking to digitise their businesses and starts using artificial intelligence to reduce workers in order to adapt to the new normal.

Meanwhile, Malaysian Iron and Steel Industry Federation (MISIF) president Datuk Lim Hong Thye says the recent endorsement by the government to allow the iron and steel industry to operate in phases is crucial for MISIF members to resume their operations gradually and reduce further financial losses.

MISIF is also looking forward to the announcement of an effective post-MCO economic stimulus package, which the government is currently getting feedback from various business associations, including MISIF.

Lim admits the MCO has caused great economic loss to the iron and steel industry due to the stoppage of operations.

The operations stoppage has caused losses in revenue, business opportunities and potential job losses in the industry.

He projects the iron and steel industry to suffer losses of RM3.2bil in revenue throughout the 28 days of the MCO and first extension, excluding substantial losses in fixed costs and other losses of business opportunities.

It also expects a more adverse economic impact to be endured by the Malaysian iron and steel industry such as a potential 50% loss of jobs if economic stimulus packages were not effectively implemented post-MCO, adds Lim.

Meanwhile, the Federation of Malaysian Manufacturers (FMM) will continue to appeal to the government to ensure continuous support for the business sector in their operations, says president Tan Sri Soh Thian Lai.

“This is as industry players get ready to resume operations and swing into full action to revive their business as the viability and continuity of the business hinges on their ability to manage their cash flow constraints and affected markets, ” he adds.

When contacted, Soh says some of the recommendations that have been put forth by FMM to the government are;

> RM5bil special soft loan scheme at low interest of 2% or a finance guarantee scheme for companies to cover the fixed capital payments and administrative payments especially wages not covered by the wage subsidy programme and building rentals and utility bills.

> Consider a total loan to cover six months of wage, building rental and utilities with a repayment period of three years.

> Allow companies to undertake employment related cost-cutting measures with minimal bureaucracy in order to keep jobs.

> Increase wage subsidy allocation to cover the wage bill of all employees and irrespective of wage level; remove conditions; increase quantum and longer period.

> Financial institutions not to compound interest; waive or reduce interest during moratorium period. Consistency across all financial institutions in treatment of interest during moratorium period.

> Further reduce interest rates for RM5bil special relief facility for SMEs from 3.5% to 2%. Lessen lending conditions including collateral requirements.

> Complete exemption or a reduction in the employer contribution to the Employees Provident Fund until end of December 2020.

> Suspend foreign worker levy for a one year period instead of the 25% reduction announced. Support companies that have to continue to depend on foreign workers as they revive their businesses after the MCO if lifted.

> 15%-30% discount in electricity for the next six months for all industrial power users irrespective of the kilowatt usage a month. February and March 2020 bills to be apportioned out to five months and to be paid from July to November 2020. Waiver of maximum demand (MD) charge to 50% from the maximum hit which could benefit medium and high voltage industrial customers. Load factor in March 2020 be compared to the previous one year average load factor to derive the formula for the discounts.

> Extend a 30% discount to all natural gas users for the next six months. Waive the “Take or Pay” penalty clause imposed on customers given the current impact of Covid-19 on businesses

> Suspend licensing requirements and grant exemption on import duty and sales tax for next six months on inputs of essential products, such as critical medical supplies as well as other essential goods

> Reduction in sales and service tax to 3% from March 2020 for a 12-month period

> Return immediately all outstanding goods and services tax refunds and remove the requirement for the 10% bank guarantee.

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