High Power Rates Worry Industries


27 May 2006




The manufacturing and cement industries are disappointed and worried over the high increase in electricity tariff rates and the bearing it would have on industry players' cost structure and bottomline. 


The Cement & Concrete Association of Malaysia (C&CA) said in a statement the energy-intensive cement industry would, under the new tariff structure, face a 14% rise in electricity rates, which would translate into an additional RM64mil a year in energy costs. 


This comes after about 30% increases in production costs from 1995 to 2005, contributed mainly by a major climb in coal price and logistic costs. 


As cement was a price-controlled item, the industry could not pass down the costs to consumers, C&CA said, adding that the ceiling price that was revised in 1995 was now lower than the domestic selling prices in most countries in the region. 


"The profit margin of the cement industry has been progressively eroded over the years and the return on investment has reached the level where it may no longer be attractive for new investments, which will be necessary as the Malaysian economy continues to grow. 


"We urge the government to review the current cement ceiling price, which no longer reflects the market situation in Malaysia. A revision of the ceiling price is long overdue and justified," it said. 


In a separate statement, the Federation of Malaysian Manufacturers (FMM) said the manufacturing sector would be paying 12.4% to 14.5% higher electricity rates under the new structure. 


The higher tariff rate would result in additional energy costs of RM11.4mil a year for a company in the iron and steel sector; and an increase of RM1mil to RM7mil per company annually for other energy-intensive industries, including electrical and electronics. 


The manufacturing sector would also be affected by the indirect impact of pass-through or multiplier effect from the increase in prices of purchased inputs, which accounts for 40% of total production costs. 


FMM estimated profit margins could be reduced by up to 3% for highly energy-intensive industries; and at least 0.5% to 1% for other industries.  


"These percentages are significant because manufacturing companies generally record profit margins of only 3% to 5%," it said. 


Exporters, which are facing lower proceeds from the stronger ringgit, could also lose their competitive edge.  
"Malaysia would be uncompetitive and unattractive to investments vis-à-vis our Asean neighbours in terms of electricity cost," it added.