Between survival and rising costs

THE full impact of the Middle East conflict has not yet completely surfaced, as some businesses are currently still relying on earlier inventory, says Executive Director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s (ACCCIM) Socio-Economic Research Centre (SERC) Lee Heng Guie. However, as old stock runs low as the disruptions in the Strait of Hormuz continue, he anticipates that businesses will face a genuine pressure point in the second quarter of this year, particularly between May and July. Lee notes that manufacturers have already expressed concerns about the future. Businesses are not only facing a sharp rise in raw material costs – with prices fluctuating almost weekly – but more critically, supply risks where stock might be unavailable even if companies are willing to pay higher prices. He says that while some operators are attempting to increase their orders with suppliers, the suppliers themselves cannot guarantee a sufficient supply. A shortage of raw materials will impact production, thereby triggering a series of negative economic domino effects, and factories may reduce their production lines. “It is not about layoffs, but rather restructuring shift systems – though I hope we do not see such a scenario,” he tells Sin Chew Daily. Lee: Everyone must be psychologically prepared for the effects of this conflict. To strike a balance between survival and rising costs, it is inevitable that businesses will raise product prices. Lee points out that some businesses have already begun issuing price adjustment notices to customers, with some planning increases in June, while others are delaying until September. He says that given the simultaneous rise in raw material and shipping costs, businesses have started adopting a cautious, wait-and-see attitude. While market demand still exists and businesses must continue production, the key issues lie in the procurement price of raw materials and the adequacy of supply. He adds that amid slowing economic momentum and weakening consumption, customers’ purchasing volumes may decrease after price hikes. They might shift to a “buy only when depleted, take only what is exactly needed” model. Operators will not blindly hoard goods to avoid getting trapped with high-cost inventory. “At this juncture, affected operators – whether suppliers, wholesalers, or retailers – will adopt a wait-and-see approach, which will consequently cause an economic slowdown.” He points out that a survey conducted by SERC among its members from March 19 to 25 this year showed that if the situation persists, businesses estimate they can only hold on for another three to six months. While businesses have not sounded emergency alarms yet, their cash flows and profit margins are clearly under pressure, he notes. Consequently, the government and Bank Negara Malaysia have rolled out various assistance measures to cushion the impact of the Middle East conflict and rising oil prices on small and medium enterprises (SMEs). Regarding the consumer level, Lee believes that the most direct impact the public will feel next is the rising cost of living, especially food prices. He highlights that the Agriculture and Food Security Minister Datuk Seri Mohamad Sabu, has already anticipated that food prices will continue to face upward pressure in the second half of this year, which is linked to the increased cost pressures faced by producing countries themselves, driving prices up. He points out that the price of fertilisers required for agricultural production has risen; hence, the future selling prices of agricultural products dependent on fertilisers will increase accordingly. “The public must be psychologically prepared that inflation will rise and the cost of living will be higher, so they need to plan their spending,” he states. Lee observes that market consumer sentiment has begun to weaken: “The crowds at outdoor coffee shops and mamak stalls at night have decreased.” Consumers are turning toward selective shopping and starting to budget their expenses. Lee explains that although RON95 petrol is currently still subsidised by the government and fuel prices remain low, supply chain disruptions and energy shocks leading to higher raw material or transport costs will be passed down tier by tier to daily necessities, ultimately affecting consumer purchasing power. However, the public does not need to completely stop spending because of this he explains: “Spend what needs to be spent; we don’t want everyone to halt their consumption.” As Lee points out, even if the war ends, international oil prices may not necessarily drop rapidly back to pre-war levels, as damaged oil facilities require a long time to repair. “Some facilities may take six months, eight months, or even over a year to recover. Therefore, everyone must be psychologically prepared that this scarring effect could persist until 2027.”