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Commodities

High oil prices squeezing Asian businesses

Fuel costs and a weak rupiah grounded Tigerair's Indonesian affiliate.

SINGAPORE/HONG KONG/MUMBAI -- Conflicts in the Middle East and Ukraine have driven up crude oil prices, putting pressure on such companies as airlines and automakers in import-dependent Asia.

     The spot price for Dubai crude, a benchmark in Asia, topped $110 a barrel in late June amid tensions in Iraq, before settling back to around $103. It has rarely dipped below $100 since 2011, and market players remain concerned that it could jump again depending on developments in the Middle East.

     Retail prices for petroleum products in Southeast Asia are tending to rise more sharply than crude oil prices, in part because of reductions to subsidies.

     Indonesia and Malaysia had subsidized gasoline on the retail market in a bid to hold prices down. But oil imports contributed to Indonesia's current-account deficit, and government debt mounted in Malaysia. Both countries started to shrink their subsidies last year, and prices are expected to climb.

     In addition, aside from oil-producing Malaysia, the bulk of countries in the region are net oil importers. The high import volume means that unfavorable exchange rates push up costs that much more.

     Indonesia's Tigerair Mandala, operated by an affiliate of Singapore budget carrier Tigerair, suspended all service last month. Operating expenses soared with the rupiah's plunge last year, and the rising cost of fuel hit the company hard, according to Chairman Jusman Syafii Djamal.

     State-owned Chinese airlines are also reeling from a one-two punch from high oil prices and a softer yuan, which drove up dollar-denominated fuel costs. China Southern Airlines likely lurched into the red for the January-June half with a net loss of around 1 billion yuan ($162 million). Air China and China Eastern Airlines probably sustained steep profit decreases.

     And at troubled Malaysia Airlines, an increase of just $1 per barrel of jet fuel will widen losses for the fiscal year by 4.3%, according to Malaysia's Maybank.

     Many are concerned that consumers will hold off on car purchases in the medium term. Malaysian automaker Perodua cut its sales target for the year to 193,000 vehicles from 197,000. Gas prices also spiked temporarily in India, and carmakers worry that this could dampen consumer interest.

     In Indonesia, price competition is heating up as companies try to create demand. Astra International, the country's largest distributor of cars, saw net profit for its automotive business slide 9% on the year for the January-June half.

     Another concern is the impact on consumer prices. Higher oil costs could hurt countries' current-account balances, weakening their currencies and raising the prices of imports beyond oil.

     Businesses have already started to brace for higher material prices by implementing further cost cuts. Malaysia rubber-glove maker Top Glove raised the thermostat at its factories. In a region as hot as Southeast Asia, this could worsen working conditions and sap productivity, but the company sees little choice in the matter.

     Incomes in Southeast Asia are rising, and consumer-related businesses such as 7-Eleven Malaysia are playing a larger role. Inflation could have consequences for consumer-spending-driven economic growth.

     On the other hand, some industries are reaping the benefits of higher oil prices. Thai oil company PTT's share price has climbed more than 10% since mid-June as tensions heightened in Iraq. Malaysia's Sime Darby, which produces palm oil, an alternative fuel, enjoyed a jump in its share price at one point as well.

 

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