05/01/2013 (The Star) - Key commodities are expected to face tougher market conditions this year to navigate price competitiveness, given bearish fundamentals such as high inventories, increasing production costs and the slowdown in export-led demand on the back of uncertainties in the global economy, say industry players.

Despite the lacklustre price outlook, 2013 still promises to be an interesting year as the Government will review, restructure and implement several commodity-related policies and measures including:

the introduction of lower crude palm oil (CPO) export duty regime unchanged since 1970s,

full abolishment of duty-free CPO export quota

the implementation of minimum wage

the restructuring in domestic steel policy/anti-dumping duties on imported steel products, and

considering a more conducive environment for the domestic mining sector to kick-start in a big way.

At the same time, the overall performance of the export-oriented local commodities this year will continue to hinge on future demand from big economies like Japan, Europe, the United States, China and Asean countries.

The price movement of crude oil, which is co-related to CPO and rubber, will also determine the price direction in 2013 for both Malaysia's strategic agri-commodities under the Economic Transformation Programme (ETP).

CPO

This year, CPO will again be challenged on both domestic and international fronts.

More significantly, the impact of the implementation of the lower domestic CPO export duty from 4.5% to 8.5% beginning Jan 1 will be closely monitored by industry players, refiners, exporters and also Indonesia, which had earlier drastically slashed its palm oil export duty by more than half in September 2011, which literally rendered the local refining business uncompetitive for over a year.

While some may say it was pay-back time for Indonesia, following Malaysia's latest counter measure, some quarters are sceptical that the measure which is a new market paradigm for Malaysia could possibly lead to further market confusion.

A Johor-based plantation player says: “Be it zero tax or lower CPO export tax, there is fear that CPO prices can be dragged lower if the record-high inventory situation is not properly addressed.” In November, Malaysia's palm oil stocks hit a record high of 2.56 million tonnes.

This year also, Indonesia the world's largest CPO producer and India, the world's largest vegetable oil importer, may review their existing fiscal policies. China, meanwhile, is expected to enforce its technical requirement on palm oil, thus making it a tougher condition for palm oil imports this year.

Therefore, given such difficult trading environment, some palm oil analysts are forecasting the average price of CPO in the first quarter of 2013 to remain below RM2,500 per tonne, with possibility that price could climb back to above RM2,800 per tonne in the second half this year “if domestic palm oil stocks can be reduced effectively to below two million tonnes by end-May”.

On the international front, even though the anti-palm oil campaigns in the form of proposals such as “Nutella Tax” in France and palm oil labelling in Australia failed to take place in 2012, market observers are expecting some other smearing campaigns instigated by Western NGOs and green activists to crop up this year, particularly in Europe.

Ironically, this is happening on the onset of oil palm being extensively cultivated in new frontiers such as Africa, Cambodia, Laos and Myanmar with the noble intention of generating income and eradicating poverty among smallholders and farmers.

Steel

Even though not under the ETP, the RM40bil domestic steel sector will likely take centrestage in 2013 if the Government decides to fully restructure its steel policy to improve on the sector's competitive edge and viability.

Malaysia Iron and Steel Industry Federation (MISIF) president Datuk Soh Thian Lai says local players are banking on the Government to continue pump-priming the economy through increased domestic and foreign investments.

The Construction Industry Development Board, in a recent report, indicated that the value of new construction jobs in the country is expected to reach at least RM91bil this year, underpinned by the ETP initiatives and the 10th Malaysia Plan.

Once the government-initiated mega infrastructure and property projects such as the Rubber Research Institute land redevelopment, Klang Valley MRT, LRT extension, Bandar Malaysia (redevelopment of Sungai Besi land) and the Tun Razak Exchange go into full swing, it will trigger a pick-up in demand for steel products.

Despite robust project flows having helped keep local steel prices relatively stronger than the international spot prices, Soh points out that the conclusion of the upcoming general election will remain a key issue as to “whether the public projects will eventually be implemented.”

Also, any imposition of anti-dumping duties by the Government on any steel product from any targeted countries, and any policy revision by this year should be supportive of the local steel industry and serve as a catalyst for the construction and industrial sector.

Soh says that while initiating any anti-dumping action, the Government should be mindful that such action will not deter the import of raw materials to promote export of finished steel products by domestic players.

“Steel pricing and quality are also important factors to face the tough conditions that already exist when it comes to competition.”

According to Soh, the Government policy relating to the industry's competitiveness can affect future development.

“As steel has a worldwide market, the future health of the industry will depend on how open the local steel market remains when import tariffs and barriers are gradually reduced or eliminated.”

MISIF has forecast the local steel industry, in terms of consumption this year, growing higher, given the implementation of more construction projects.

While there may be an increase in long steel product consumption due to the projected increased growth of 6.6% in construction sector this year, Soh expects the steel industry to experience a continued decrease consumption of flat steel products due to volatile global outlook and a projected drop in manufacturing sector growth.

New minerals

Tin has been the traditional commodity in local mining scene for decades but strong interest has cropped up to mine minerals such as steel, coal, gold, copper and nickel in Malaysia.

“This (development) is no big surprise, especially when Malaysia has a mineral resource potential worth RM340bil at current prices that can be developed,” says Malaysian Chamber of Mines executive director Muhamad Nor Muhamad.

Several mineral-rich state governments have also given positive response towards mining, as can be seen from the encouraging numbers of mining leases and exploration licences and renewals granted lately.

However, there are still some areas requiring improvement, such as the duration of time taken in deciding on the grant of such applications and renewals, suitable incentives to enable the cost of doing business to become more competitive. Another critical area is the size of mining leases granted, which currently tends to be limited to small areas and shorter lease periods, thus rendering mining uneconomical.

On the part of the state governments, the Chamber would like to see a speedier decision-making process by the authorities on applications and renewals of mining leases and exploration licences.

Also, these state govenments should make available more potentially mineral-rich lands available for exploration and mining development.

As for tin, Malaysia Smelting Corp Bhd deputy group chief executive officer Chua Cheong Yong says the industry outlook is cautiously optimistic this year.

While recent price upward movements are largely funds-driven, he expects the recovery in global economy and continuing supply issues to exert upward pressure on tin prices in 2013.

However, the recent report of surplus tin stocks in China is expected to abate any significant upward adjustment to prices.

Nonetheless, prices are expected to trend higher in 2013 and industry price predictions have ranged from US$23,000 to US$30,000 per tonne, explains Chua.

The tin industry is also still besieged by supply issues as major producers Yunan Tin (China), PT Timah (Indonesia) and Minsur SA (Peru) are expected to report lower 2012 production .

Therefore, demand growth for tin is expected, on the back of a global economic recovery, to be back on track towards the second half this year, explains Chua.

In addition, the new mining laws and consequential restrictions will continue to bear on the Indonesian tin industry in 2013. Rubber

The local rubber sector this year will continue to rely on the support from major importing nations to stay competitive, says the Malaysia Rubber Board director-general Datuk Dr Salmiah Ahmad.

In the upstream sector, she points out that the challenges will be centred on addressing old issues, particularly low productivity and declining natural rubber (NR) production.

Despite efforts to improve productivity, the NR production is pegged to drop by 8% to 9% in 2012, owing to unfavourable weather conditions. In fact, there is no indication that NR production will pick up this year.

“Productivity remains low due to the existence of old and low-yielding clones, ageing smallholders that do no comply with good agriculture practices, unskilled harvesters and low adoption of latest latex harvesting technologies and low mechanisation,” explains Salmiah.

To date, Malaysia's average yield per hectare stands at about 1,500 kg, which is much lower than other major producing countries.

The downstream sector, meanwhile, will be challenged by the implementation of the minimum wage effective this month, increase in gas tariffs and NR prices, strong nitrile glove growth as opposed to rubber gloves, labour shortage and environmental issue, elaborates Salmiah.

The implementation of minimum wage, for example, will likely see a minimum hike of about 29% inwages.

Salmiah says glovemakers which rely more on manual labour have been on a labour-reduction drive, incurring capex at RM70mil to RM80mil each, to improve automation levels. “They plan to cut unskilled workforce involved in stripping, counting and stacking by as much as 30% in 2013,” she adds.

However, as a result of the decrease in workers, Salmiah expects the impact of the wage hike among major manufacturers to be as little as 2% of total production cost this year. Labour accounts for about 8% to 9% of the glovemakers' total production costs.

She also points out that gas accounts for about 4% to 7% of total production costs among local glove manufacturers, hence, any increase in tariffs will see their costs increasing by an additional 5% to 8%.

In addition, the cost of raw materials for glovemakers would incur between February to May this year as the wintering season sets in and production declines.

Also, the industry which is reliant on foreign workers, will continue to face labour shortage, particularly in the upstream and downstream sectors.