AnalysisSSESSMENTS: Detailed Analysis of COVID-19 Impact On Business, Polymers Demand in Malaysia

Summary:

• Malaysian government first imposed the Movement Control Order (MCO) on March 18
• To date, the Movement Control Order (MCO) has been extended three times
• To ensure there is no mass movement, government considers to defer Eid Al- Fitr holiday 
• Most converters with permits can only operate at maximum 50% of the production rate before April 29
• As of April 29, converter with permits are allowed to operate at full capacity 
• Employees worked in shifts, layoff reported in textile industries
• Demand for polymers declined at least 30% after MCO was implemented
• End product sales to export market dropped between 30-40%
• Most sellers had to sell resins at losses 
• Ports were congested and intermediary warehouses were overstacked
• Export and import activities, as well as 24 hours operation at ports, are allowed starting April 29
• Malaysia’s gross domestic product (GDP) predicted to fall by 6%
• Weak demand for polymers expected to persist up to Q4 of 2020

Malaysia announced the first confirmed cases of COVID-19 on January 25, 2020. In March, a significant jump in cases was seen, which led to the Movement Control Order being imposed on March 18. During the Movement Control Order (MCO), businesses and services deemed to be non-essential were closed. Public sporting, religious events and gatherings were cancelled. There is also a restriction on entry of all foreign tourists and visitors to the country. Various rules for social distancing have also been implemented, such as only allowing one person per household to leave the house for matters such as grocery shopping and closing roads in various parts of the country to limit movement. During MCO, manufacturers in the selected sectors require approval from the Malaysian Ministry of International Trade and Industry (MITI) to continue operation. After gaining the approval, the operations need to be carried out according to permitted conditions. 

To date, the Movement Control Order (MCO) in Malaysia has been extended three times. First announced on March 18, the MCO planned to last until March 31. However, on March 25, the government extended it to April 14, and on April 10 once again announced extension to April 28. On April 23, the MCO was entering its fourth phase with another two week extension, until May 12 although the number of recovered patients increased. Based on the latest statistics, the number of recovered patients has risen to 3,542, which means 63.2% of the cumulative number of patients have recovered. Following the sharp drop in COVID-19 cases, the government planned to loosen the regulations a bit, but it remains possible that the MCO will be extended again. Despite the extension, the number of businesses that gained approval from MITI increased, SSESSMENTS.COM noted.

Since MCO was implemented, Malaysia has faced some economic challenges. As a start, Malaysia’s economy had slowed even before the COVID-19 outbreak, due to lower palm oil, crude oil and natural gas output, and a fall in exports amid the US-China trade war. The situation worsened as during MCO, shutdowns on economic activity and weak demand for goods and services caused cash flow issues. Therefore, some companies, in textile industries for example, were unable to pay debt, filed bankruptcies and released employees. Moreover, Malaysian Ringgit was traded in a volatile mode as an open economy like Malaysia’s is vulnerable to external weaknesses brought upon by uncertainty caused by the COVID-19 pandemic. After the third extension of MCO was announced, Malaysian Ringgit traded at 70 basis points lower against the US Dollars. 

Market players in the polymers market also felt the negative impacts of MCO and the COVID-19 outbreak. Traders and converters attempted to gain approval from MITI to continue operation. Some received the approval, some others did not. Most converters with permits can only operate at maximum 50% of the production rate. Not all were granted permission to run up to 70% operating rate, SSESSMENTS.COM was informed. However, as of April 29 those converters with permits are allowed to operate at full capacity. Among all PVC manufacturers in Malaysia, only 30% that gain permission to reoperate and not all of manufacturers in the figure continue production due to high stocks of end products. The permit is just a precaution if there are inquiries from customers. Demand for end products sags both in the domestic and export market. Demand from export destination countries dropped between 30-40% compared to before MCO was implemented. 

Despite the reduced rates and slow sales, converters contacted by SSESSMENTS.COM did not release employees yet. Employees worked in shifts and big companies paid full salary while small and medium-sized enterprises (SMEs) reduced the salary based on the working hours. The maximum working hours allowed during MCO is 9 hours. As for sellers of raw materials, most had to sell at losses in order to move cargoes amidst weak demand. The marketing arm of a Middle Eastern PE producer estimated that demand for polymers in Malaysia dropped at least 30% after MCO was implemented as compared to before it was imposed. For PVC in particular, demand declined up to 90%. Besides having bad sales, traders mentioned that collecting payment from buyers was also difficult. Due to financial difficulties and in order to minimize expenditure, some traders asked workers to take unpaid leaves. Market talks have it that a big trading firm in the country is considering laying off some employees after cutting salaries could not maintain a healthy cash flow.

On the logistics front, port activities are slowing down since MCO was implemented. Due to the slow process and lack of manpower to do the clearing, the port was congested. To ensure Malaysia’s ports are running smoothly and the capacity is at optimum level, the government carried out port clearing activities. The port clearing has been carried out four times; March2 27-29, April 4-7, April 13-15, and April 20-23. However, the cargoes mostly went to intermediary warehouses outside Malaysia’s ports. The warehouses were also almost reaching full capacity, SSESSMENTS.COM was told. On April 29, the government announced that ports are allowed to resume export and import activities and to operate 24 hours per day. The permission is not only for essential goods but also for non-essential goods.

As the COVID-19 outbreak undeniably brings negative impacts on many sectors in Malaysia, the government is looking into the possibility of deferring Eid Al- Fitr holiday. The step is believed necessary to ensure there is no mass movement that might lead to new cases of COVID-19. Traditionally, people of Malaysia do “Balik Kampung” or visit their hometown during the holiday. The decision to move Eid Al- Fitr holiday was previously made by Indonesian government. So far, Malaysian government has not made any decision yet. Malaysia's Senior Minister Ismail Sabri Yaakob said that the government will decide whether the holidays are to be rescheduled after getting views from the Islamic Affairs Minister. 

Anticipating the economic impact of both COVID-19 and the regulations imposed, Malaysian government has announced stimulus packages to support the country’s economy. In February 2020, the Malaysian government issued an emergency stimulus package worth USD4.8 billion. The package implements strategies that include spurring economic growth, promoting investments, and encouraging businesses to adopt automation and digitalization in their processes. USD453 million was allocated for the tourism industry, one of the hardest hit by the pandemic. On March 27, 2020, the Malaysian government issued the second stimulus package valued at MYR250 billion (USD57 billion). The second stimulus package has a budget for initiatives aimed to help SMEs (small and medium-sized enterprises), provide discounts on rent and electricity. It also includes one-off payments to provide relief to various groups. These groups include e-hailing drivers, students and those in the M40 (Middle 40%) and B40 (Bottom 40%) income groups.

Looking ahead, the Malaysian Institute of Economic Research (MIER) estimates that around 2.4 million Malaysians would lose their jobs due to the Covid-19 crisis, mainly consisting of non-salaried jobs while unskilled workers would make up 67% of the figure. Household incomes are projected to fall by 12% and consumer spending might plunge by as much as 11%. Overall, Malaysia’s GDP is predicted to shrink by 6% in 2020. 

Meanwhile, demand for polymers in Malaysia is predicted to remain weak up to the end of 2020. The government might loosen MCO and allow more and more to resume business, but financial difficulties from during MCO will not be immediately resolved. Hence, most market players opined to SSESSMENTS.COM that substantial improvement in the polymers market will only be apparent in 2021.

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