PETALING JAYA: The rising cost of raw materials, particularly with the added stress of the Russia-Ukraine conflict on commodity prices, will weigh on PPB Group Bhd’s margins this year even as it continues to struggle with supply chain disruptions and labour shortages.

       The group’s grains and agribusiness segment – its largest revenue contributor – may continue to take a hit as the raw material costs of flour, feed and maize products soar with limited options for the group to mitigate the rise.

       Additionally, freight cost has also gone up substantially.

       “Our grains and agribusiness has continued to be challenging given the rising cost of raw materials and disruption in the supply chain.

       “We have not seen this level of wheat cost for the last 13 to 14 years. And wheat prices will continue to go up and that is going to affect our margin. And the fact that we can’t pass on all the cost to consumers is going to be challenging for our agri business,” managing director Lim Soon Huat said at a media and analyst briefing yesterday.

       Lim added that it was inevitable that some of the cost would have to be gradually passed on to consumers and that consumers will have to “accept that they are going to pay more”.

       It has started to raise some of the prices of its goods – slightly over 10% for flour, for example – since last December. But this has not been sufficient to cover the cost increase. Jeremy Goon, chief executive officer of the group’s flour producer FFM Bhd, noted that wheat makes up about 85% to 90% of production cost for its flour mills, making it a challenge for the group to absorb the increase.

       “Wheat is now at US$10 (RM42) per bushel, it used to be US$6 (RM25) at mid-last year,” he said.

       Goon added that the Russian invasion would have a longer-term impact on commodity prices.

       Notably, Russia and Ukraine supply about 30% of all wheat exports globally, as well as 19% of corn exports and 80% of sunflower oil exports. And with the possible delay in their wheat and corn planting seasons, which are only a few weeks away, this may exacerbate prices further.

       “Inflation is here to stay. What we see in Ukraine is not going to get better. The impact on the entire grain supply is that it is going to fundamentally change the flow of grains from the source.

       “In the past, Ukraine and Russia have always been the lowest-cost grain suppliers. And now, buyers have no choice but to move to more reliable markets like the United States, Australia and Brazil and that means higher cost.

       “So it is inevitable that we have to pass on some of the cost to consumers. But we won’t pass on the cost unreasonably. We will be fair,” said Lim.

       Note that for the financial year ended Dec 31, 2021 (FY21), its grains and agribusiness segment turned in losses of RM21.27mil. However, this was mitigated by a profit of RM82.79mil from its associates.

       PPB’s other businesses, including its property, consumer products and film distribution arms, are also faced with the challenges of rising costs and labour shortages.

       For the full year, the group posted a net profit of RM1.5bil on the back of RM4.86bil in revenue.

       However, a bright spot for the group is the high level of crude palm oil (CPO) prices, which surpassed the RM8,000 per tonne level this week.

       “It is uncharted territory,” said Goon. But with all the factors supportive of prices – including depleting stocks, disrupted supply chains and the plunge in sunflower oil exports – he expects the high CPO prices to remain for the first half of the year.

       This will benefit its associate company Wilmar International.

       Lim is also positive that the other segments of the conglomerate’s business such as its property and film distribution segments will see earnings recovery with improved consumer sentiment this year.