World market prices for sugar down, Malaysia going up and up

Sugar subsidy hike seen negative for MSM

CIMB Research expects the recent sugar subsidy hike to have a negative impact on Felda’s sugar unit, MSM Malaysia Holdings Bhd.

“The 34 sen per kg hike in sugar subsidy for domestic sugar refiners is bad news for MSM, as we estimate that the increase is five sen short of the amount needed to cover the rise in raw sugar costs,” the research house said in a report yesterday.

“This is negative for MSM as the increase in subsidy is not sufficient to cover the rise in raw material costs for the current year,” CIMB said.

It pointed out that MSM had to pay a higher raw sugar cost following the end-2011 expiry of the long-term contracts for raw sugar at 17.5 sen per pound.

“Raw sugar now costs around 26.5 sen per pound, inclusive of transport costs. MSM also has to source the raw sugar from the international market at market prices, exposing it to higher volatility of raw material costs. We estimate that MSM needs a further five sen per kg rise in sugar subsidy to maintain 2011’s absolute profit margin,” it said.

CIMB said this “negative news” may lead to short-term weakness in the company’s share price.

“Apart from rising cost pressure, MSM may also be affected by slower demand growth if the Government reduces the subsidy and raises sugar retail prices over time.

“Going by the experience of the past two years, there is a good chance of a review of selling prices and subsidies provided around May–July this year.

“Despite the negative news we maintain our “neutral” rating, given the share price support from its dividend yield of about 5%. Also, the sugar industry may be liberalised gradually, which would be positive for the company,” CIMB said.

It noted that the Government had raised the subsidy for domestic sugar refiners by 34 sen per kg to 54 sen on Jan 1, 2012, to cover the rise in raw sugar costs following the expiry of long-term contracts at the end of last year. The retail selling price for coarse and fine sugar remains at RM2.30 per kg.

“The revision to the subsidy rate for sugar is not a surprise, as the long-term contracts for raw sugar expired at end-2011 and the Government typically reviews and adjusts the sugar subsidy at the beginning of the year to reflect changes in raw sugar costs.

“We are also not surprised that the retail price for sugar is unchanged given the upcoming general election,” it said.

CIMB, however, said it was surprised that the Government had yet to seal new long-term contracts for raw sugar at fixed prices.

“This is unusual, having happened only once in the past. Sugar producers are now sourcing raw sugar from the international market, which is negative as it exposes the sugar refiners to higher volatility in raw material costs.

“It is unclear if the delay in the signing of new long-term sugar contracts is due to pricing issues or is part of the Government’s plan for gradual liberalisation of the domestic sugar industry,” it said.

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THE FOLLOWING REPORT IS OLD: 9 May 2012. It is still relevant.

Malaysia Insider

Sugar price up 20 sen tomorrow

May 09, 2011

Datuk Seri Idris Jala’s Pemandu agency said last year that subsidy cuts were needed to bring down government expenditure. — file pic

KUALA LUMPUR, May 9 — The price of sugar will be raised by 20 sen to RM2.30 effective at midnight.This follows a previous increase in December last year, which saw the price being raised by a similar amount.

The increase is part of the government’s concerted subsidy cuts first announced on July 16 last year, when prices went up by five sen per litre for petrol and diesel, 10 sen per kg for LPG and 20 sen per kg for sugar.

It also comes after the price of RON97 petrol was increased by 20 sen last week. RON97 is, however, not subsidised and its price determined by a managed float.

Last week, the United Nations released a survey projecting a moderate slide in economic growth for Malaysia this year due to rising food and fuel prices, which economists predicted would be further hampered by the government’s lack of political will for reforms.

Sugar Price Increase

Domestic sugar price went up by 40% from Jan 2010 to May 2011 ever since the sugar monopoly was taken over by FELDA from Robert Kuok. Yet at the old price, Robert Kuok could make good profit.

Global Sugar price stable from Oct 2009 to Apr 2011.