Are businesses profiteering from low oil prices? - The Malaysian Insider

As the debate on the price of goods takes on an increasingly racial tone with calls to certain businesses, there is some good news from vegetable wholesalers – the price of leafy greens is set to drop this week to a fraction of what it was a month ago.

According to the Vegetable Wholesalers Association (VWA), leafy vegetables such as kangkung, sawi (mustard leaves), spinach, and bok choy (Chinese cabbage) will go for as low as RM1 per kg.

A month ago, they were going for as high as RM8 a packet even in working-class neighbourhood supermarkets.

But the fall in prices for vegetables is not likely to satisfy those who believe that low fuel prices automatically means lower grocery bills, and that if it does not, it means businesses are profiteering.

In fact, it shows how the whole debate is more complex than Umno politicians such as Datuk Seri Ismail Sabri Yaakob make it out to be.

The agriculture and agro-based industries minister had earlier last week urged Malays to boycott errant Chinese traders on his Facebook page.

Ismail had courted controversy after he posted the remark in relation to prices of goods that have not gone down despite the drop in petrol and diesel prices.

Ismail said Malay consumers had a role in helping the government fight profiteers by using their collective power to lower the prices of goods.

VWA secretary Chong Tek Keong said the fall in prices of vegetables was mostly due to the weather.

The prolonged rainy season led to low harvests and prices went up. As the weather improved, farmers all over the country are harvesting their crops all at once and now there is a glut.

This illustrates how there are more complex factors that determine the price of goods than just the price of oil and that high prices cannot simply be blamed on race and profiteering.

Combination of factors

The debate on whether low oil prices was going to be good for the country started late last year as they began steadily falling from US$60 (RM216) per barrel in November.

Even then one of the country’s think-tanks, the Malaysian Institute of Economic Research, said that it was difficult to predict whether low fuel prices would result in a net benefit.

This is because there are other factors in the production chain that affect the final price consumers pay at the store counter.

One big factor that came with low oil prices was a weak ringgit, which meant that manufacturers and suppliers would need to pay more for imported raw materials and goods.

Today, the ringgit was trading at RM3.56 to the US dollar. A few weeks ago it had fallen to about RM3.60 to the greenback, its lowest in six years.

The ringgit’s value, said Federation of Malaysian Consumers Association (Fomca) chief executive Datuk Paul Selvaraj, was a big determinant in final store prices.

“Most of our food is imported. I asked a retailer how much of his goods are imported. He laughed and said how much is left that is local?” said Selavaj, when describing one of the groups’ surveys among retailers.

“Import costs are a big factor. What a retailer gets today from the importer goes directly to the shelves,” said Selvaraj.

Chong estimates that 30% of the country’s produce has to be imported and the figure rises every year.

In a brief email, the Federation of Malaysian Manufacturers (FMM) also said the ringgit’s depreciation had caused the cost of raw materials such as milk solids and meat to increase sharply.

Another factor is the price of electricity, which has not come down even though the price of fuels for power generation – natural gas, liquefied natural gas and coal – has fallen.

Lembah Pantai MP Nurul Izzah Anwar said when Tenaga Nasional Berhad raised tariffs by 15% in January last year, natural gas was RM13.70 to RM15.20 per MMBtu, coal was US$85-87.5 per tonne and LNG was RM41.68/MMBtu.

Coal, she said has come down to US$67 per tonne while the prices of gas and LNG have come down in parallel with the price of crude oil.

And then there are also unequal market conditions, such as monopolies for certain goods and materials.

Licensing restrictions to import can create monopolies, said Selvaraj. This could lead to price fixing among those involved in the monopoly.

According to the International Trade and Industry Ministry’s (Miti) website, there are more than 30 items which required an import licence.

The list includes rice, sugar, wheat flour, milk, steel and iron products, cars, motorcycles, construction machinery and helmets.

Miti’s website states some reasons a permit is needed for these materials. They include the need to protect the interests of local manufacturers, public health and local plant life.

“Retailers say they can offer cheaper prices if there was more freedom to bring in goods,” said Selvaraj.

He said the government has to create a more liberated and open market as that would drive up competition.

“More competition would force entrepreneurs to work harder to bring in cheaper products to attract more consumers.”

Oil still matters, a lot 

But even with the fact that the production supply chain is ruled by numerous factors, the effect of low fuel prices should not be overlooked.

Petrol, said Selvaraj, was still considered a high multiplier, when it came to calculating the consumer price index, a metric used to measure inflation.

“It is a significant component. We feel that a drop in fuel prices warrants a general decrease in prices. Businesses have always used the excuse of high fuel prices to raise the price of goods.”

When there is little response from producers on why there is not even a small drop in prices when fuel costs go down, it breeds suspicions that they are profiteering.

This is seen in the numerous groups that came out to support of Ismail’s statement for Malays to boycott Chinese businesses.

In a February 4 report in Utusan Online, some of these groups even claimed that prices have even gone up even while petrol is now RM 1.70 a litre.

One commentator, Irwan Fahmi Ideris of Malay supremacist group Perkasa, said the price of a “kopi O ais” was more than a litre of petrol.

When The Malaysian Insider asked the FMM, whose members included food and consumer goods manufacturers, to respond to allegations of profiteering, this is its response: “There are many elements/variables affecting price increase/reduction of manufactured goods.

“The entire supply chain has to be factored in, from the cost of raw materials, energy, logistics, packaging, financing, to foreign exchange rates.

“However, our members will always explore all avenues to manage costs for optimum production and improve productivity and we are committed to pass on cost savings to customers by way of price reduction where feasible.” – February 9, 2015.