Not all players benefiting from pandemic

TheEdge Tue, Jul 21, 2020 03:00pm - 3 years View Original


WHILE most locally listed plastics companies are expected to benefit from the surge in demand for packaging products — boosted by the rise of e-commerce and food delivery businesses amid the Covid-19 pandemic — this may not be the case for the industry as a whole.

According to Datuk Lim Kok Boon, president of Malaysian Plastics Manufacturers Association (MPMA), the main challenge faced by plastics companies during the Movement Control Order (MCO) period has been the shutdown of businesses in the non-essential sectors.

With the majority of plastics companies falling under this category, only those that directly or indirectly produce packaging materials for the food sector, or personal protective equipment (PPE), face shields, disposable medical aprons, plastic gloves, medical bottles, sprayers and hand sanitisers, are benefiting from the pandemic.

“Generally, the demand for and sales performance of most plastic products had declined over the past three months, except for those for PPE, and medical and food packaging sectors,” Lim tells The Edge in an email interview.

The industry veteran says plastics companies that have been negatively affected by Covid-19 are namely those supplying to non-essential sectors such as construction, automotive, household and consumer goods.

“The total production value for the plastics industry is about RM33 billion per annum, or RM90 million per day. The total loss during Phases 1, 2 and 3 of the MCO was about RM2.9 billion. This is equivalent to almost 9% of the total annual sales turnover,” says Lim, formerly the CEO of GW Plastics Holdings Bhd, before the company was renamed MCT Bhd following a reverse takeover exercise in 2015.

 

Hit by MCO

Lim recalls that almost all plastics companies in the country shut down their operations during the first week of MCO1.

From the second week onwards, however, the government had allowed some of them to operate. These included firms in the PPE sector as well as those supplying to the domestic essential sectors — for example, medical, food and food packaging — and the major export sectors, products of which primarily comprise plastic films for food packaging.

During MCO1 and MCO2, only about 40% of plastics companies were allowed to operate at 50% capacity to cater for essential sectors, says Lim. Approvals were given to more companies during MCO3 when the average operating capacity increased to 60%. By that time, the majority of plastics companies had resumed production.

Lim acknowledges that there was indeed an increase in demand for plastic packaging due to a rise in orders for packed food, such as bread, instant noodles, sugar and flour, as well as containers for takeaways and packaging for online transactions.

“Besides, a large portion of plastic packaging are films and containers used to pack processed foods, beverages, rice, sugar, edible oils and detergents, as found on the shelves of supermarkets and convenience stores,” he explains.

And with more families eating in and home cooking becoming more common, demand for plastic packaging increased correspondingly due to the need to store excess food.

“Companies producing packaging for food, containers for food deliveries, PPEs and packaging [for online transactions] are expected to continue doing well this year,” Lim comments.

However, with the global economic downturn and high unemployment rates, he expects consumer spending to decline, affecting the overall growth of the plastics industry.

 

Beneficiary of lower oil prices

Lim says as the output of plastics manufacturers is usually components for other business activities along various supply chains — such as that of the food, electrical and electronics (E&E) and automotive sectors — the plastics industry’s recovery post-MCO and the pandemic is dependent on the performance of these sectors.

“The supply to essential sectors such as food, medical and PPE was not impacted by the MCO. Demand for certain durable goods, including electrical appliances, printers, computers, routers and air conditioners, has increased due to work-from-home arrangements, while some E&E appliances have seen a drop in demand,” he adds.

Demand for big-ticket items such as cars, however, will resume only after consumer confidence returns, while demand for construction materials is expected to be adversely impacted by the overhang in the property market, Lim says.

On a positive note, the current low oil price environment should bode well for plastics manufacturers, as resins — which constitute 30% to 70% of the total production cost of their finished products — are derived from crude oil and natural gas.

“With the drastic decline in crude oil and gas prices, the cost of plastic resins has dropped to 20% to 30% in the first quarter of this year,” says Lim, adding that prices had gradually recovered since April.

While the lower cost of resins has eased the cash flow burden of plastics manufacturers, it has had little impact on the companies’ profits as most of the cost savings have been passed to consumers, he explains.

On the overall outlook, Lim says the plastics industry is expected to see a decline in performance this year, followed by a mild recovery in 2021 and stronger growth in 2022.

“The pace and magnitude of the recovery are dependent on the recovery of the global economy, which in a way is also dependent on how effective and how soon the pandemic is kept under control.”

He adds that with the continuous advancement in machinery and processing technology, improved material properties and innovative product design, there is great potential in high value-added areas such as medical devices, precision engineering parts and the aerospace industry.

Established in 1967, MPMA has about 750 members that make up 60% of plastics manufacturers in Malaysia and account for 80% of the country’s total production of plastic products.

 

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