How logistics players can help to meet NEM targets

They have to re-orientate the way they think of business, ops and processes

MALAYSIA is at a crossroad. It has done well to boost economic growth, thanks to sound economic strategies and management.

From being a developing nation dependent upon commodities and agriculture to power its economic growth, Malaysia is now one of the top 20 trading nations. However, it has fallen into ‘middle income trap’.

The economy, while more diversified today compared with three decades ago, is still reliant upon labour-intensive activities.

Malaysia’s vulnerability to external shocks, as seen during the recent global recession, underscores the urgent needs for the economic transformation to be more robust by climbing up the value chain.

Maritime players must boost efficiency in the production of goods and the provision of services.

The New Economic Model (NEM) provides the compass with which Malaysia can refer to in deciding which way to go from this crossroads.

FMM proposes Double Tax Deduction on Freight Charges

The Federation of Malaysian Manufacturers have made certain recommendations to the Government for Budget 2010. Below is an extract of the part of FMM's recommendations that relates to the logistics industry:

Over 80% of Malaysian exports are currently exporting Free On Board (FOB) due to highfreight rates and various ancillary charges imposed by shipping lines. However foreign buyers prefer to be quoted Cost, Insurance and Freight (CIF) as an all inclusive price.

Exporting on FOB basis reduces the competitiveness of Malaysian manufactured products and restricts access into the global markets. Currently, a double tax deduction on freight charges is given to the following sectors:

a. All manufacturers who ship their goods from Sabah and Sarawak to Peninsular Malaysia provided they use the ports in Peninsular Malaysia; and

b. Manufacturers who export rattan and wood-based products (excluding sawn timber and veneer) qualify for double deduction on freight charges.

Ship freight charges for all other sectors are allowed single tax deduction.

FMM’s Recommendation:
To increase market and trading potentials and encourage exports on CIF basis, double tax deduction on freight charges should be given to all manufacturers who ship their goods from Malaysian ports to international markets.

Read the rest of FMM's Budget 2010 recommendations here.

Baltic Dry Index set to surge

The Baltic Dry Index (BDI) may hit 4,000 points in the current quarter, propelled by increasing demand for iron ore and grains from China, analysts say.

The BDI, a measure of shipping costs for commodities, rose 5.6% to 2,284 points on Oct 1 from 2,163 on Sept 24.

The highest level it reached this year was 4,291 points on June 3.

An analyst with a local research house told StarBiz that he expected the BDI to jump to more than 4,000 points in the current quarter as iron-ore demand from China was forecast to increase due to a pick-up in construction activities there.

“This was because most construction works were slow in the third quarter owing to hot weather, which is quite common especially in southern China,” he said. “Now, the weather has cooled which is more conducive for construction works to resume.”

The analyst added that the cold weather also prompted more coal to be exported to China.

Bloomberg reported China Ocean Shipping (Group) Co as saying the BDI might surge more than 80% by the year-end on increased demand from China.

And a report posted on www.business-standard.com said China’s steel makers were buying more iron ore as the government had implemented a US$586bil stimulus package to revive growth.

“China’s economy is forecast to expand 8.2% this year, compared with the March estimate of 7%,” it said.

Iron ore is the largest dry-bulk cargo moved by sea and China is a major consumer of the commodity.

Furthermore, the analyst said bumper crop harvesting such as wheat and corn in the United States would also contribute to the rise in the index.

“This is because the bumper harvesting will drive grain prices down where it is expected to create demand,” he said.

The positive BDI outlook augur well for Malaysian Bulk Carriers Bhd (Maybulk), Kenanga Research said, noting that the shipper had agreed to acquire a 3½-year vessel of 32,000 deadweight tonne, Ikan Juara, for US$23.75mil.

“The group’s current fleet will expand to 13 after the addition of Ikan Juara,” the brokerage said in an update report.

Source: StarOnline

M'sian shipping, aviation recovery may take 2 years

MIMB Investment Bank expects the second half of this year to be tough for the Malaysian shipping industry, mainly due to worldwide excess vessel capacity, which would continue into 2010.

"Although the phasing out of single hull vessel ruling will only come into force in 2010, we think that the imbalance in supply and demand will take time to correct itself," its analyst Rosnani Rasul wrote in a report dated June 29.

The phasing out of single hull vessels under the International Maritime Organisation (IMO) regulations will see some 35 per cent of global vessels cease operations in major trading routes.

Rosnani said that with the exception to dry bulk shipping, the situation in other shipping segments, including tankers and chemical, have not improved in the first half of this year (1Q09).

"In fact, most shipping players in the world, including local firms, have recorded significantly lower 1Q09 earnings, no thanks to weak demand which was exacerbated by excess capacity," she added.

During the booming year in 2007, most shipping companies rushed to add new buildings, which resulted in significant number of new ships entering the global market.

As a result, the number of order book as a percentage of dead weight tonnes reached a staggering 60 per cent for some, like chemical. This has weakened shipping rates to a record low and made some companies operate at below their operating cost, said Rosnani.

As for the airline industry, she said some airlines are still trapped in expensive jet fuel cost hedging, no thanks to the spike in crude oil price last year.

Some still have to purchase their crude oil at US$100 (RM357) per barrel compared with the average of US$43 (RM153.51) per barrel in 1Q09.

"With the ongoing threat of the influenza A (H1N1) flu, coupled with expensive fuel hedge value, the airlines industry may face a tough time ahead.

"This will be exacerbated by the prolonged weak demand following the slow recovery in global credit crisis," said Rosnani.

She foresees some improvement on the card only in the second half of 2010 when stabilisation in crude oil price will play an important role.

"Most countries in the world are likely to record positive gross domestic product growth by then, and hence, will be a precursor to the recovery in air travel," she added.

In view of the gloomy economic outlook, MIMB Investment Bank has reiterated its "underweight" call on the transportation sector, and predicts that the recovery period for the shipping and aviation sectors may take up to two years.

Source: Business Times

KL under pressure again over cabotage policy

Manufacturers, traders and shippers in Sabah are bringing renewed pressure to bear on the federal government to further liberalise the National Cabotage Policy (NCP).

The policy keeps out foreign vessels from the movement of goods between Port Klang, the designated national load centre, and ports in Malaysian Borneo.

Federation of Sabah Manufacturers (FSM) president Wong Khen Thau warned that the federal government must complete the liberalisation of the policy without any further delay and not continue to indulge in cosmetics.

"The opening up of the policy is an issue that Sabah has been pursuing all this while," stressed Wong on the sidelines of the weekend opening of Wisma FSM at the Kota Kinabalu Industrial Park (KKIP) in Sepanggar Bay.

"If the policy is further opened up, then I think it (liberalisation) will be complete," he added.

Wong was commenting on the renewed public debate on the pros and cons of the NCP but he has so far refused to get into the polemics.

The Transport Ministry, not so long ago, announced some "piece-meal measures" aimed at easing the policy and deflecting increasing public criticism of the federal government over the higher cost of living in Sabah and Sarawak compared with Peninsular Malaysia.

The NCP is being blamed for the price difference in consumer perishables, among others. At the same time, salaries in Malaysian Borneo are very much lower than that in Peninsular Malaysia.

If the NCP has heated up again in recent days as a political hot potato, it is with good reasons too. One result of the policy is that job-seekers shun the numerous jobs available locally and still make for greener pastures in Brunei, Peninsular Malaysia and Singapore.

Association says no to liberalisation

Executive secretary of the Malaysian Shippers Association (Masa), Imtiaz Hussein, poured fuel on the fire in recent days when he launched a pre-emptive strike against further liberalisation by issuing a media statement on the issue.

Basically, it was a feeble attempt to deny that Masa members are behind the comparatively higher cost of living in Malaysian Borneo.

Briefly, he claimed that members of Masa are charging reasonable prices; the prices imposed by Masa are not the only cause - there are other parties that are causing the higher cost of goods in Sabah and Sarawak.

"It is important to point out the flawed arguments of shippers who blame high shipping costs and want the federal government to relax the National Cabotage Policy," said Imtiaz, who vowed that Masa would strongly oppose any further liberalisation of the NCP.

Masa's aggressive defence of the NCP in Sabah and Sarawak has sent the hackles up among people from all walks of life in Sabah and Sarawak and caused them to see red on the issue.

Trading community spokesperson John Lo, among those vociferous on the issue, begs to differ with Masa and has been picking at what he sees as the flaws in the association's arguments.

He points out that Masa has not mentioned collusion practices by its members on price-fixing; whether there is free and fair competition among its members for the South China Sea routes between Peninsular Malaysia and Sabah/Sarawak; and that Masa has not revealed facts and figures which the public can use to benchmark their prices vis-à-vis other similar routes.

"In this logistics supply chain, ocean freight charges (paid to the shipping line) for imports into Kota Kinabalu, for example, from Port Klang constitute about 40 percent, it is claimed," said Lo.

"In any business environment where cost reduction is a constant worry, a cost component of 40 percent is already a very significant item and should be examined in the minutest details."

Lo added that it was not for Masa to decide whether other components in the cost scenario were high or low.

Cartel overrules people's need

Shipping industry watcher Loong Chai, who has examined the cost structure closely, points out that except for freight charges which are determined by the ship owners, all other cost components are controlled by the government.

"The port charges, for example, in Sabah have not changed since it was introduced in the 1970s. So, how is it that port charges takes a major portion of the cost?" asked Loong.

"The forwarders fees as well as for haulage is less than RM500 per container. So, how can this portion be the cause of the higher logistics cost?" he asked.

Their places continue to be taken by illegal immigrants flooding in from the Philippines, Indonesia, Timor Leste, Pakistan and Bangladesh, among others.

Whether Masa accepts or otherwise, it cannot be denied that their cost per 20 foot container is not less than RM2,000 and this cannot be only 40 per cent of the total cost, continued Loong.

Loong is well armed with other figures on the carrying capacity of ships on the South China Sea run, their cruising time between ports in Malaysian Borneo and their fuel usage.

He thinks such figures serves little purpose whatsoever in the debate over the NCP.

"After 30 years of making appeal after appeal, it is obvious that the needs of the shipping cartel are much stronger than that of the people of Sabah and Sarawak," said Loong.

"There is no point arguing with the ship owners because the NCP gives them complete monopoly in domestic shipping. There is no point in appealing to the government as well because it will make endless studies with no clear solution."

The NCP has caused a lot of people in Sabah and Sarawak much frustration and numerous lost opportunities in business and trade, added Loong.

Having injected a note of pessimism and hopelessness into the debate, Loong thinks that "not all is lost".

He refers to a little known debate taking place in local circles on restructuring Sabah's trade pattern away from Peninsular Malaysia to beat Masa at its own game.

The 'Muara School of Thought'

Statistics tell the story. Sabah, for example imports 58 percent of its requirements from Peninsular Malaysia while sending only 13.2 percent of its exports there and 17 percent, for example, to China.

The suggestion being seriously considered is that Sabah import more goods from China, Hong Kong and Taiwan via the international container port of call in Muara, Brunei.

Muara, the only port in Borneo that is not affected by the NCP, is just a hop, step and jump away from Menumbuk, Labuan, Kota Kinabalu and other places along the west coast of Sabah.

The 'Muara School of Thought' is expected to take off, as Bruneiseeks to diversify its economy, even as the pressure continues for the lifting of the NCP.

Lo is among those who concede that the total cost scenario should be looked at once again "to expose the flaws in the Masa arguments and the findings made public".

Source: Malaysiakini

Malaysian economy contracts 6.2pc in Q1, recession inevitable

KUALA LUMPUR, May 27 - The Malaysian economy is worse than expected, contracting 6.2 per cent in the first quarter from a year ago, its worst fall since the fourth quarter of 1998 at the height of the Asian financial crisis.

It is the first time in eight years that the gross domestic product (GDP) has experienced a quarterly contraction which also translates to a drop of about 7 per cent from the last quarter of 2008.

Bank Negara also believes that it has continued into the second quarter and while the central bank is confident of improvements in the second half of 2009, governor Tan Sri Zeti Akhtar Aziz would not say if Malaysia would return to positive growth this year.

The government had expressed optimism that the export-driven economy will return to growth in the third quarter after slumping in the first half of 2009 as exports plunged.

Prime Minister Datuk Seri Najib Tun Razak had already cautioned the government will revise down its forecast for Malaysia to weaken by one per cent for most of 2009

“The second quarter will be very similar to the first. But there will be improvements in the second half,” Zeti said.

She explained that measures taken to strengthen the economy, which includes two government stimulus packages amounting to RM20 billion to be spent this year, may support positive growth in the last quarter and into 2010 if the situation externally is favourable.

Despite admitting that two quarters of negative growth would be considered a recession, Zeti refused to be drawn on whether Malaysia has slumped into one.

“We are now in very exceptional circumstances,” she said, explaining why making forecasts is difficult.

“We already anticipated a very slow growth as the financial crisis has become more prolonged than earlier expected and the deterioration in global economy was far greater than expected,” Zeti told reporters.

The hardest hit sector in the quarter was manufacturing which was down 17.6 per cent although construction, which has been a key element in the stimulus packages, managed to register a 0.6 per cent growth.

The services sector was also down 0.1 per cent after it had grown by 7.2 per cent for 2008 with the transport and storage sub-sector shrinking by 3.9 per cent, its first drop since 2003.

The country’s short-term growth depends on a global recovery boosting demand for its electronics, oil and commodities exports and also on Asian giant China’s consumption holding up.

Najib, who is also Finance Minister, has said Malaysia will have to change its economic model in order to generate future growth, adding he would concentrate on innovation and creativity particularly in services for Asia’s third-most export-dependent nation.

Najib will announce a new GDP forecast tomorrow.

Source: Malaysian Insider