MARKET DEVELOPMENT
Increase in Foreign Worker Levy Spells Higher Costs For Planters
Increase in Foreign Worker Levy Spells Higher Costs For Planters
03/02/2016 (Borneo Post) - The increase in levy for foreign workers has been in-creased effective Feb 1, 2016, with analysts citing this to increase op-erating production costs for palm oil and rubber players, which may discourage labour supply.
To note, foreign workers in the plantation and agriculture sectors will have to pay an annual levy of RM1,500 from RM590 for plantation and RM410 for agriculture.
Foreign workers in the manufacturing sector would have to pay an annual levy of RM2,500 from a previous RM1,010.
Public Investment Bank Bhd (PublicInvest Research) expects operating production costs for the majority of Malaysian plantation players to face an increase between four to six per cent, which is about RM50 per metric tonne.
“As labour costs make up about 30 per cent of the plantation’s production cost, we estimate that the foreign labour levy hike is likely to increase the Malaysian plantation average production cost by about RM1,450 to RM1,500 per mt,” it calculated in a report yesterday.
“nevertheless, as we see an increase of 20 per cent in crude palm oil price this year, we think the higher operating cost could be easily absorbed by the local planters, which has about 80 per cent of foreign labours in the workforce,” it further added.
Analysts at RHB Research Institute Sdn Bhd (RHb Research) did not expect the impact to be significant to overall net profit for players, but said this move could signal that the government is willing to increase taxes for the plantation sector should the need arise.
“One way this could potentially be done is to raise export taxes on CPO, to be on par with that of Indonesia,” it forewarned in a separate report yesterday.
“While this would reduce income for the planters, it would also result in levelling the playing field with the Indonesian planters, resulting in Malaysian CPO becoming more competitive globally, which could in turn, improve export volumes.
” Meanwhile, looking at the rubber sector, TA Securities Holdings Bhd (TA Research) believed the hike in foreign worker levy would be absorbed by workers themselves as checks with various managements reveal that levies for foreign workers are commonly borne by the workers themselves.
“With the heavy increase in levies as aforementioned, the good news for foreign workers is that they will be able to largely offset it against the impending minimum wage hike of RM100 per month effective July 1, 2016,” it detailled.
“Despite the neutral impact from the approach above, there may be a risk of a shortfall in labour supply if foreign workers are discontent with the increased levy burden and subsequently decide to seek employment elsewhere.
“To avoid such an occurrence, we could possibly see manufacturers sharing the incremental levy with foreign workers as long as the overall cost of foreign workers are still lower than that of local labour.
“The downside to this approach is that manufacturers will have to then increase their average selling prices (ASPs) to customers to mitigate the cost increase.
” To illustrate, in a prudent scenario whereby manufacturers bear the incremental levy entirely, with labour making up on average 10 per cent of operating costs, TA Research estimated that ASPs will have to be raised by 1.2 per cent for a full cost pass through.
“Take note though that a drawback of the cost pass through mechanism is that manufacturers may not be able to immediately re-adjust ASPs with customers,” it further said.
“Hence, assuming an 80 per cent cost pass through, our estimates indicate potential earnings dilution of 0.9 to 1.8 per cent across glove and condom heavyweights.
To note, foreign workers in the plantation and agriculture sectors will have to pay an annual levy of RM1,500 from RM590 for plantation and RM410 for agriculture.
Foreign workers in the manufacturing sector would have to pay an annual levy of RM2,500 from a previous RM1,010.
Public Investment Bank Bhd (PublicInvest Research) expects operating production costs for the majority of Malaysian plantation players to face an increase between four to six per cent, which is about RM50 per metric tonne.
“As labour costs make up about 30 per cent of the plantation’s production cost, we estimate that the foreign labour levy hike is likely to increase the Malaysian plantation average production cost by about RM1,450 to RM1,500 per mt,” it calculated in a report yesterday.
“nevertheless, as we see an increase of 20 per cent in crude palm oil price this year, we think the higher operating cost could be easily absorbed by the local planters, which has about 80 per cent of foreign labours in the workforce,” it further added.
Analysts at RHB Research Institute Sdn Bhd (RHb Research) did not expect the impact to be significant to overall net profit for players, but said this move could signal that the government is willing to increase taxes for the plantation sector should the need arise.
“One way this could potentially be done is to raise export taxes on CPO, to be on par with that of Indonesia,” it forewarned in a separate report yesterday.
“While this would reduce income for the planters, it would also result in levelling the playing field with the Indonesian planters, resulting in Malaysian CPO becoming more competitive globally, which could in turn, improve export volumes.
” Meanwhile, looking at the rubber sector, TA Securities Holdings Bhd (TA Research) believed the hike in foreign worker levy would be absorbed by workers themselves as checks with various managements reveal that levies for foreign workers are commonly borne by the workers themselves.
“With the heavy increase in levies as aforementioned, the good news for foreign workers is that they will be able to largely offset it against the impending minimum wage hike of RM100 per month effective July 1, 2016,” it detailled.
“Despite the neutral impact from the approach above, there may be a risk of a shortfall in labour supply if foreign workers are discontent with the increased levy burden and subsequently decide to seek employment elsewhere.
“To avoid such an occurrence, we could possibly see manufacturers sharing the incremental levy with foreign workers as long as the overall cost of foreign workers are still lower than that of local labour.
“The downside to this approach is that manufacturers will have to then increase their average selling prices (ASPs) to customers to mitigate the cost increase.
” To illustrate, in a prudent scenario whereby manufacturers bear the incremental levy entirely, with labour making up on average 10 per cent of operating costs, TA Research estimated that ASPs will have to be raised by 1.2 per cent for a full cost pass through.
“Take note though that a drawback of the cost pass through mechanism is that manufacturers may not be able to immediately re-adjust ASPs with customers,” it further said.
“Hence, assuming an 80 per cent cost pass through, our estimates indicate potential earnings dilution of 0.9 to 1.8 per cent across glove and condom heavyweights.