While the government plays down expected inflation from the recent electricity tariff hike, industry players fear that a combination of hikes in product costs could send prices surging.

An area which is showing signs of this is the food industry, which in April recorded a 4.9 percent hike compared to the same time last year.

NONE “For the food industry, the electricity and gas increase will raise costs but it is the indirect costs through logistics and transport which could push prices up for consumers.” said Federation of Malaysian Manufacturers’ (FMM) OK Lee.

Lee added that producers who export their goods may not find it easy to pass on the cost to their overseas customers, but may offload it on their domestic buyers instead.

Double whammy

Agreeing with Lee, an operations manager for a food processing plant in Johor said that he does not expect the electricity tariff hike alone to have a major impact.

The manager, who spoke on condition of anonymity, said coupled with increases in the petrol and sugar prices, this could hurt their bottom line.

 

“With sugar and fuel prices going up at around the same time, it is a double blow to our cost structure,” said the manager, whose company exports to more than 10 countries.

toll booths and commercial vehicle lorry 151206 Already, transport companies have warned of raising their fees by up to 30 percent with the withdrawal of industry subsidies, but for companies who have their own delivery fleet, the cost could be slightly allayed.

“The drivers have all complained that the transport allowances are not enough, so we have had to raise them and our transport costs have gone up by 8 percent as a result,” said the manager.  

So far, he said, the company has decided not to pass the cost down to consumers mostly because it is facing stiff competition, but expects to raise prices further down the line if cost continues to rise.

Pressure on property prices too

FMM’s Lee said that the government may deny it now, but the most likely effect of cuts in gas subsidy every six months until 2016 on electricity tariffs - which follow the same schedule - raises fears of an inflation spiral.

Beyond the grocery bill, reverberations down the supply chain could also lead to higher house prices, as Lee said that the steel industry would be the most adversely hit as it is a gas-intensive industry.

NONE Malaysian Iron and Steel Industry Federation president and Southern Steel chief operations officer Chow Chong Long said that steel mills will take a 10 percent hit in costs, while middle and downstream players could face a 6.2 percent increase.

“A typical steel mill could pay an additional RM20 million to RM50 million a year because of the 10 percent increase... power costs would now form up to 40 percent of the total expenditure.

“Those who use more gas would be impacted with an additional RM5 million to RM20 million per year,” he said, adding that the extra cost would certainly be passed on to consumers.

Chow however said that increases in the steel price should not raise house prices as steel in fact makes up a very small percentage of construction material, but contractors have thus far cited hikes in steel prices to justify costlier properties.

Malaysia’s inflation rate hit an annual 3.2 percent - double the pace of last year - with economists warning that inflation could be as high as 3.8 percent by month’s end.

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