KUALA LUMPUR (May 18): The steep climb in commodity prices to multi-year high levels, if not record high, is inflating companies' input costs at a time many businesses are struggling with low sales volumes brought about by the Covid-19 pandemic.

Noting that a "margin squeeze is inevitable" for manufacturers, Federation of Malaysian Manufacturers president Tan Sri Soh Thian Lai said it is not that easy to pass on the cost increments to customers, citing scenarios in which companies could be bounded by contracts, renegotiations would be needed for price adjustments.

He commented that the rise in commodity prices is a global phenomenon and is likely to impact all businesses especially amongst competing suppliers. Any price hike will trigger a chain effect, he added.

"Given the current economic conditions, some manufacturers are content to keep their business alive and sustain jobs, and not concerned with optimising profit," said Soh.

However, he noted that even if the commodity prices have increased, it may not necessarily translate into higher costs immediately as businesses producing commodities-based products would have hedged by keeping some inventories.

Nestle (Malaysia) Bhd (Nestle Malaysia) chief executive officer Juan Aranols acknowledged that there will be some cost pressures anticipated from the rise in commodity prices, but he stressed the company is confident in containing the impacts and in delivering another year of solid results.

"We have taken steps to mitigate the impact of the commodity headwinds, including our hedging policies in place," Aranols told The Edge, adding that Nestle Malaysia is driving multiple initiatives to increase efficiency in the ways of working, which will contribute further to manage margins.

"We continue to be cautiously optimistic and will continue to manage our commercial strategy and our cost and organisational structure with a view on driving steady and long-term sustainable performance," said Aranols, noting that the company continues to observe solid demand for its brands, despite operating in a highly uncertain environment currently.

"As we venture into new category opportunities, such as plant-based foods and drinks, we remain convinced that a deep understanding of consumer value translating into sustainable growth remains the most effective weapon to protect margins," he added.

Bermaz Auto Bhd chief executive officer Datuk Francis Lee Kok Chuan sees that all automakers will have consumers shoulder the extra cost burden, should the commodity prices, especially steel, remain consistently high.

If this situation is temporary, then most principal automakers will absorb this price increase, Lee added.

"But as the pandemic is still raging, most principal automakers will absorb this price increase and we as distributors will be spared for the time being," he said.

Lee, however, said there will be minimal impact on car prices as steel cost only constitutes about 6.9% of total car costs, and only 10%, if including other materials.

At least three commodities have more than doubled in price over the past one year. Iron ore rose the most by 129% to close at US$207.30 per tonne yesterday, followed by crude palm oil that was up 121% to RM4,687 per tonne and Brent crude oil that was 110% higher at US$68.29 per barrel.

For metals, such as copper and tin, both shot up significantly by 96.86% and 96.37% respectively.

The climb in gold, on the other hand, was not as steep. Still, the precious metal increased by 21.8% from its closing price of US$1,517.27 per ounce as at end-2019.

There are companies that have been sheltered from the impact of the commodity boom.

MSM Malaysia Holdings Bhd, for one, said that there will be no impact as the company has hedged (the prices) all of its requirements for 2021.

In contrast, MSM said it is seeing much higher margins due to improved average selling prices (ASPs) and has reduced refining costs. Hence, better margins will compensate any lower market volume.

With its higher ASPs and stronger margins that are still below the gazetted prices as allowed by the government, MSM said there will still be sufficient headroom for adjustments in view of any cyclical increase in raw sugar costs.

SCGM Bhd, which is seeing higher demand for its food and beverage (F&B) packaging, has been able to increase selling prices to defend its profit margins. Likewise, the situation is similar among its peers in the packaging industry.  

"We are able to adjust our ASPs to mitigate the rise in raw material prices," said its managing director Datuk Seri Lee Hock Chai, adding that the F&B packaging segment has thrived, amid the pandemic.

"Based on our past experiences, as we do not hold any long-term contracts with our customers, we can easily pass the additional costs directly to them by raising our ASPs proportionally to the increase in raw material prices," said Lee.

Hence, Lee does not foresee any "huge negative impact" on SCGM's profit margins.