Industry observers expect the sugar subsidy hike to have a negative impact on Felda’s sugar unit, MSM Malaysia Holdings Bhd as the increase is five sen short of the amount needed to cover the rise in raw sugar costs.
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. 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. MSM needs a further five sen per kg rise in sugar subsidy to maintain 2011’s absolute profit margin.
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 2012.
However the sugar industry may be liberalised gradually, which would be positive for the company.
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 2010. 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 2012 to reflect changes in raw sugar costs.
The retail price for sugar is also unchanged given the upcoming general election.
The Government had yet to seal new long-term contracts for raw sugar at fixed prices. 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.
Methylsulfonylmethane (MSM) is an organosulfur compound with the formula (CH3)2SO2. It is also known by several other names including DMSO2, methyl sulfone, and dimethyl sulfone.[1] This colorless solid features the sulfonyl functional group and is considered relatively inert chemically. It occurs naturally in some primitive plants, is present in small amounts in many foods and beverages, and is marketed as a dietary supplement.
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