This article first appeared in The Edge Financial Daily on May 29, 2019
KUALA LUMPUR: Chemical Company of Malaysia Bhd (CCM) is cautious about its overall margin for the year ending Dec 31, 2019 (FY19), as it expects the average caustic soda selling price to remain soft compared with last year.
As such, it will be “tough” to maintain the group’s financial performance in FY19, said group managing director Nik Fazila Nik Mohamed Shihabuddin.
For the first quarter ended March 31, 2019 (1QFY19), the group’s net profit fell 37.4% to RM6.25 million while revenue slid 4.36% to RM96.96 million despite higher sales volume, largely due to the decline in caustic soda selling price, whereas input costs, as well as selling prices of other chemicals and polymers, have remained largely stable.
Caustic soda makes up slightly over 40% of CCM’s FY18 revenue. Its selling price, Nik Fazila said, fell from its average of around US$600 per tonne in FY18 to around US$400 (RM1,676) currently.
“We are not going to enjoy [an] upcycle of caustic soda prices as we have experienced in 2017 and 2018,” she told reporters after the group’s 57th annual general meeting yesterday.
This is because while India’s import of the product is expected to normalise soon, the effect may be offset by softer demand in China due to the temporary shutdown of alumina plants there, which is a core consumer of caustic soda.
However, the group seeks to address the narrower margin with higher volume, amid production capacity that will come on stream this year and the next. In addition, the group’s continuous effort to improve cost efficiency, such as reducing finance costs, energy consumption, and more automation, will help on the matter.
“We have maxed up [production capacity of] both of our chemicals and polymers plants, thus the reason we are embarking on our capacity expansion drive. That is key,” she said.
The additional 50% capacity for its chemicals business will come in full from the expanded chlor-alkali plant in Johor, Pasir Gudang Works 1 (PGW1) as early as August this year, said Nik Fazila.
The increase to 60,000 electrochemical units (ECU) will allow CCM to produce as much as 135,000 tonnes of caustic soda annually from 90,000 tonnes currently. Current production contributed around 57% of the group’s chemical business revenue or around RM170 million in FY18.
CCM expects demand to remain robust, as the nation imports over 140,000 tonnes per year, excluding the demand from Petronas’ Refinery and Petrochemical Integrated Development (Rapid) facility in Pengerang that is also coming on stream.
“Rapid, at its maximum, requires 156,000 tonnes [per year],” said Nik Fazila. CCM was last month awarded a contract to supply up to 351,000 tonnes of caustic soda to Petronas over three years for RM315.9 million, with a one-year extension option.
CCM also produces calcium nitrate — another chemical used by glove makers — which contributed about RM24 million of group revenue in FY18. Nik Fazila expects demand for this product to remain on the growth path in line with sustained demand growth for rubber gloves.
However, the group has no immediate plan to expand beyond PGW1 for now, as the demand-supply dynamics in Malaysia for other major by-product from the chlor-alkali plant, chlorine, is currently balanced.
On that, CCM will go back to the drawing board when there is a big uptick in chlorine demand, says Nik Fazila, such as for water treatment plants.
Under its higher-margin polymer business, CCM’s new facility for cleaning solution for glove makers “Kleeners” in Bangi will be fully commissioned in the second half of 2020, to add another 90% of its existing Kleeners production — which accounted for around RM15 million in annual sales or 15% polymer segment revenue in FY18.
The new Kleeners facility will be semi-automated, said Nik Fazila. The group is also looking at pockets of improvements in the distribution and logistics operations to cut costs.