The knock-on effect

ONE of the truisms of the business world is that companies would not want to pay more if they can avoid it.

That was why many businesses had used natural gas to power up their manufacturing activities when the price of the commodity was low and subsidised.

In search of higher margins, the lower price of natural gas was a cheaper alternative than buying electricity from the grid. But as subsidies were slowly rolled back, that gap benefit started to shrink, and with the latest increase beginning next year, the higher cost of natural gas will affect a number of businesses which had relied on cheaper energy costs to buff up thin margins in their industry.

Industries should have known that the days of subsidised natural gas were going to end. That signal was sent sometime back when the government made it known that such subsidies would be rolled back in stages to eventually reflect market prices.

The provision of the subsidy in natural gas has been borne by Petroliam Nasional Bhd (Petronas) all these years, and the cumulative amount since the subsidies were given in 1997 is around RM250bil. That has been the revenue forgone by Petronas to support local industries through subsidised gas.

The reality now is that as prices move in stages towards free-market prices, the cost to Petronas would be lessened over time. Companies that have benefited from cheap gas in the past will need to seek more productive measures to ensure that such cost increases can be mitigated in their course of doing business.

For industries that use a lot of natural gas such as the rubber glove industry, that increase in the energy cost will eat into margins until they can pass on the higher costs to their customers, or improve productivity.

The one drawback in this, though, is that most Malaysian companies would be ill-prepared to absorb higher costs, and for the consumer, that would lead to higher costs.