Local food manufacturers concerned about fallout from Middle East energy crisis

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SINGAPORE – For soya sauce maker Thomas Pek, the fallout from the Middle East energy crisis has hit his business in a far more painful way than recent crises, including the Covid-19 pandemic.

Not only have the costs of his soya sauce bottles and bottle caps risen since oil supply disruptions wreaked havoc on prices of polyethylene terephthalate or PET resin – a key material for plastic bottles that is made from crude oil – but his production and transportation costs have also increased on higher diesel prices.

“During the pandemic, our costs did not increase so much. Back then, we exported less to maintain food security here. But this crisis is worse than the pandemic. All our costs, from packaging to transportation, production, delivery, freight and shipping insurance, have increased,” said Mr Pek, managing director of Tai Hua Food Industries.

Even though industry diesel, which Tai Hua buys directly from oil refineries in Singapore, has jumped from $1.20 a litre in late February to $3 a litre on April 10, Mr Pek has not raised his soya sauce prices yet.

He said his company has been absorbing the higher soya sauce bottle and cap costs, which rose 8 per cent in March and by another 15 per cent in April. He noted that Tai Hua’s freight costs and shipping insurance will also increase as it exports soya sauce to the Middle East, Holland and Mexico.

Mr Pek added that he may have to raise prices by 10 per cent to 15 per cent from May, as the PET resin shortage and high prices of diesel – which powers Tai Hua’s boilers to steam soya beans and cook soya sauce – could persist, given that the damage to vital energy infrastructure in the Middle East will take years to fix.

Diesel powers road freight, agricultural machinery, construction equipment, rail and a large part of industrial activity. Hence, shortages of diesel will raise the costs of freight, food production and industrial output, while shortages of petrochemical feedstock, which is used in the manufacturing of plastics, can lift packaging costs and, in turn, the costs of certain processed food.

“This is even more severe than the pandemic because the oil shock affects everything. But we have not seen the full impact of the crisis yet,” said Mr Raymond Tan, president of Singapore Food Manufacturers’ Association (SFMA), which has more than 420 members.

“There’s no big price increase for food products yet because manufacturers have been absorbing the increased costs, and tapping ingredients and packaging materials secured before the war. But once these stocks are depleted, and new orders of ingredients and packaging materials are made, that’s when the full impact will kick in,” he said.

Local vegetable, egg and fish farms also expect to be affected by the increased cost of fertiliser production, as nitrogen fertilisers are natural gas-intensive products.

With the Middle East accounting for about 30 per cent of global fertiliser trade, shipment disruptions from the region have resulted in global prices of urea, a form of nitrogen fertiliser that farmers normally use, rising more than 35 per cent over the past month.

Compounding the shortages, trade restrictions by China and Russia are tightening global fertiliser supply, particularly for import-dependent countries in Asia and Australia, according to ANZ Research.

Besides tighter availability, higher fertiliser and energy prices have lifted production costs, which could lead to a reduced planting area, along with lower fertiliser application, and result in less bountiful harvests, increasing the risk of food inflation, the research house said.

If these higher costs and shortages persist, farmers may use less fertiliser or plant fewer crops, which would in turn weigh on yields and food availability, ANZ said.

Due to challenges exporting fertilisers from the Middle East and China, Singapore-based global agri-commodity firm Agrocorp International has been focusing its efforts on alternative sources in Pakistan, South Korea, Morocco and Vietnam, Mr Vishal Vijay, its chief executive, said.

But the impact of higher fertiliser costs and fertiliser shortages on food prices remains uncertain, he said.

Crops such as wheat and rice use more fertiliser than more nutrient-efficient crops like soya beans and pulses such as chickpeas and lentils. So, potentially, farmers will plant more soya beans and pulses, which could moderate food price increases, he said.

Mr Vishal believes the impact of higher freight costs on food prices will be marginal as “the imported price of agri-commodities is only a fraction of the final retail price”. “Other factors including manufacturing costs, distribution costs and retail margins play a role in determining what consumers pay.”

Higher fertiliser costs

In Singapore, some local vegetable, egg and fish farms have been absorbing the higher costs of fertiliser, feedstock and diesel, but they said they will pass on the costs to consumers if energy and fertiliser prices and other costs remain elevated.

Local egg farm Chew’s Agriculture does not expect its feed supply to be disrupted, but feed costs, which are the main costs of running a poultry farm, have risen significantly and could continue to add to its operation costs as long as the war continues.

“Our feed is from Malaysia but the raw ingredients are sourced globally and very much impacted by world events... We have also seen an increase in price of consumables such as packaging material. The steep increase in diesel prices has increased our distribution costs tremendously,” general manager Chew Zi Xuan said.

“We are absorbing these cost increases for now, but should the war continue, we will have to look at increasing our egg prices,” he said.

In addition to higher packaging costs, many food ingredients, especially agriculture-based products such as grains, flour and starches, are likely to see price increases due to higher fertiliser costs and shortages, said SFMA’s Mr Tan, who is also managing director of noodle manufacturer Tan Seng Kee Foods.

Given the jump in logistics and shipping costs, Mr Tan said manufacturers are considering ways to save on costs by consolidating deliveries and sharing transportation costs.

“We are also looking at producing certain food items on certain days or at certain times to save on fuel,” he added.

Energy-efficient solutions

More manufacturers may also tap the Energy Efficiency Grant, which supports companies that adopt energy-efficient equipment, Mr Tan said.

“This grant will enable us to get more fuel-efficient equipment like cold rooms and cookers”, and push more companies to embed sustainability in their operations, he said.

Senior Minister of State for Finance Jeffrey Siow said in Parliament on April 7 that the base tier of the grant will be expanded from the current six sectors – food services, retail, manufacturing, construction, maritime and data centres – to cover all areas.

Under the existing framework, the base tier provides up to $30,000 in funding support and was originally set to run until March 31, 2027. The scheme will be extended by a year to March 31, 2028, so more companies can benefit, Mr Siow said.

Chew’s Agriculture has installed solar panels on its rooftops and expects to cut its power costs substantially as they come online in the next few months.

While this could help offset operations cost increases, Mr Chew said “the supply and cost of our plant-based feed will soon see the ripple effects of (higher fertiliser costs)”.

“Food price inflation is a very real possibility, if the conflict is not resolved in the near term,” he said.

Singapore Aquaculture Technologies, which operates indoor floating farms in the Johor Strait, has “made a huge investment in renewable energy (floating solar energy)” and will become less dependent on diesel from July, its chief executive Dirk Eichelberger said.

“Feed prices have not yet gone up for us but we expect an increase of 10 per cent in the next couple of weeks. Diesel has more than doubled in price and this may continue. Our (fish production) costs have increased, but our ability to raise prices is limited due to competition. But we may have no choice if the situation persists,” he said.

Anticipating supply disruptions, vegetable farm Meod’s move to increase its stockpile of key inputs such as fertiliser at a higher cost, prior to the Iran war, has provided some buffer, a company spokesperson said.

But the broader trend of rising input costs continues to hurt local food producers, Meod said.

In addition to fertiliser, higher diesel and energy costs are affecting its delivery and distribution operations.

“We have been absorbing as much of these cost increases as we can. But our resources to absorb prolonged market volatility are limited. We are reviewing our pricing carefully and will do our best to keep any adjustments fair and measured,” Meod said.

ST has approached Wilmar International and Olam Group for comment.