This article first appeared in The Edge Financial Daily on June 24, 2019
KUALA LUMPUR: The days ahead may not be as sweet as before for the domestic sugar refiners given the change in the operating landscape that features possibly rising competition from imported sugar — something that is totally new to them.
In addition, the movements of international raw sugar prices could eat into the local refiners’ profit margins in the form of higher input costs. The domestic players have to import a large bulk of its inputs, namely raw sugar.
Despite the grouse, the ministry of domestic trade and consumer affairs seems to be firm on opening up the sugar industry that is dominated by just a few players for long.
There will be no policy reversals for existing sugar import permits issued, Deputy Domestic Trade and Consumer Affairs Minister Chong Chieng Jen said.
Furthermore, Chong reiterated that more of such sugar import permits will be granted to other food and beverage (F&B) manufacturers nationwide in the future.
“The message to the local refiners is that they have enjoyed protectionism for too long and that they will have to be competitive. If they sell cheaper to the end-users, there is no reason for the players to import,” Chong told The Edge Financial Daily when asked about the concerns raised by the local sugar refiners.
“It is a nationwide policy. We will see how it goes. [But] my next target will be Sabah, I believe it is a similar issue [faced by F&B manufacturers there] and that more of them will come forward to apply,” he added.
To recap, the ministry approved eight permits for Sarawak F&B manufacturers to import up to 60% of their sugar requirements earlier this month.
The move to liberalise the market — part of the federal government’s efforts to dismantle monopolies in several sectors locally — met with local refiners’ appeal for the government’s reconsideration.
The domestic sugar industry is dominated by refiners MSM Malaysia Bhd and Central Sugars Refinery Sdn Bhd (CSR), which rely heavily on the import of raw sugar.
MSM is a 51%-owned by publicly-traded FGV Holdings Bhd, which, in turn, is controlled by the Federal Land Development Authority. CSR, meanwhile, is a unit under Tradewinds Corp Bhd owned by businessman Tan Sri Syed Mokhtar Albukhary.
The two giants operate five sugar refinery plants capable of producing a total capacity of three million tonnes a year, which are double the current annual domestic demand of 1.5 million tonnes.
The overcapacity is partly because MSM’s plant in Johor plant, which was built last year to cater to the anticipated demand growth and the age of its Prai and Perlis refineries.
To the refiners, the government’s decision should be reconsidered.
“This will inevitably have a negative impact on the country in the mid to long term, especially when global sugar prices increase. This is a risk that our nation cannot afford to take,” said MSM and CSR in a joint statement.
But the government won’t budge.
According to Chong, who is also Sarawak Pakatan Harapan chairman and member of parliament for Stampin, it is “unfair” to local F&B manufacturers to take high costs as a fact of life, especially when refined sugar were sold to them at 40 sen to RM1 per kilogram price premium over that of Thailand imports.
Any idle capacity should also be carried through by the refiners as capacity expansion is a private sector business decision, he added.
“I think MSM & CSR should sell at the range of the international sugar prices.
“Consumers aside, they should look into reducing the prices of sugar sold to the industry players and not continue to exploit them,” Chong said, adding that this will help bring down costs and add to the competitiveness of Malaysia’s (food) manufacturing industry.
When contacted, MSM refuted claims that there has been exploitation of industrial users by local refiners.
The company said it sells refined sugar to industrial players based on the market price. Premium charges of between RM850 and RM1,200 a tonne are applied to different customer specifications of sugars and packaging.
“Industrial users have been buying refined sugar from us based on market price. This price has always been and remains competitive, as evidenced by the growth of the F&B industry in Malaysia.
“Several industry players in Sarawak have been buying sugar from the wholesalers with the exception of a few. The price given is not based on our actual selling price to industry players, as it is determined by the wholesalers in Sarawak,” MSM group chief executive officer Datuk Khairil Anuar Aziz said in a written response.
Citing Brazil, Thailand, and Australia as examples, the company highlighted sugar is a price-controlled item in most countries and that local prices are often higher than international sugar price.
“As a result, producer countries tend to ‘dump’ their excess sugar, which is why certain industrial players have been able to access sugar at lower rates, which impacts local refiners.
“However, when sugar prices on the international market increase, these same players will turn to Malaysian refiners to buy sugar at controlled prices,” he added.
MSM was already out of favour for a while due to margin squeeze as a result of high input costs.
The stock is assigned one “hold” call and five “sell” calls, Bloomberg data showed, one of which was rated by CGSCIMB Research in view of its “challenging prospects”.
CGSCIMB Research wrote in a report dated June 14 that further liberalisation of the sugar industry will exert further pressure on sales volume and profit margin of MSM due to the lower average selling prices (ASPs) of its refined sugar.
“We estimate that for every RM10 per tonne reduction in ASP achieved by MSM, it could reduce the group’s revenue by RM8 million and profit by a similar quantum, if MSM was not able to cut costs,” said CGSCIMB.