Thursday April 13, 2006

While many an economic forecast has deemed East Asia and Malaysia to be bullish or at least optimistic in 2006, the increasing prices of commodities, such as oil, are proving to be a minor reality check.

Oil aside, strong manufacturing demand from China and India for copper, aluminium, steel and tin, as well as investments from speculators looking for better returns than from stocks and bonds, are also driving metal prices up.

Economists and analysts contacted by StarBiz yesterday expressed their concerns over these price hikes, especially in view of their potential impact on metal-reliant industries, as well as the local economy and consumer demand.

Hwang DBS head of research and director Vincent Khoo said a persistent increase in metal prices would no doubt have implications on the inflation rate, and could also result in margin erosion for companies that used metal as a raw material.

“The price surge of metals is going to affect the margins of companies like electronic products manufacturer OYL Industries Bhd. The effect could be across the board and we might see a major part of the manufacturing sector experiencing margin erosion as well,” Khoo said.

As long as there continued to be over-liquidity in the market, he expected the bull run, which seemed to “have a life of its own,” continuing and metal prices gaining further.

“Demand, however, would recede eventually, although it is difficult to say when this would happen,” Khoo added.

Head of research for OSK Securities Kenny Yee said the cable manufacturers could be the hardest hit, since the price of copper had appreciated the most.

“We see cable manufacturers like Leader Universal Holdings Bhd, Supercomal Technologies Bhd and Wonderful Wire & Cable Bhd to be the ones most affected, while the impact on Metrod Malaysia Bhd would be neutral since the company has back-to-back orders in its pipeline.”

He does not see the same impact for aluminium manufacturers though, as the metal’s price hike ias smaller compared with that for copper. Despite that, Yee said aluminium-related companies such as Kian Joo Can Factory and PMB Technology Bhd might still feel the pinch as these companies would not be able to pass on the full extent of the price increases to their consumers.

“Looking at gold, both Yikon Corp Bhd and Poh Kong Holdings Bhd could be affected as they are into the wholesale and retailing of gold jewellery, although the impact may not be apparent as it would depend on their levels of inventory. However, gold companies may be enjoying a slight advantage during the current uptrend in gold prices,” he added.

SBB Securities senior analyst Ng Jun Sheng, meanwhile, said he did not expect fastener manufacturer Tong Herr Resources Bhd to be adversely affected by the increase in steel prices, given the strong global and local demand for the company’s products.

“The semi-conductor industry would also not face so much impact as companies like Malaysian Pacific Industries Bhd and Unisem Bhd experience less problems transferring their rising costs to end-users,” Ng said, adding that was because semi-conductor products were sold at constantly increasing prices anyway, due to the fast-changing technology landscape that influenced much of the industry.

Ng was not too concerned about the local economy as he believed Malaysia was well-buffered, saying the “laggard” nature of the economy could also mean the country was less sensitive to global bumps.

ECM Libra senior vice-president of research Lucius Chong is adopting a more realist view of the economy and stock market.

“There are about 500-odd analyst forecasts of a bullish 13% average earnings per share (EPS) increase among the companies listed on Bursa. However, the price jumps could very well slow things down. We are projecting a 5.5% EPS increase,” he said.

Chong said experts expected the price uptrend to continue, and with rising inflation resulting from the recent petrol price increase, consumers would not be too happy if companies experiencing margins squeeze opted to pass on some of their higher costs to consumers. Given this scenario, companies would still have to absorb much of the cost pressure, Chong said.

In response to StarBiz yesterday, RAM Consultancy chief economist Dr Yeah Kim Leng said the degree of price increase borne by consumers would depend on the proportion of metal used in manufacturing.

He said the surge in metal prices was a boon to companies that were involved in the extraction, processing and export of metals like gold.