High oil price seen eroding local firms' profit margins
Mushrooming global petroleum prices are eroding profits at China-based manufacturers that use oil-derived materials such as plastics and in turn hurting companies such as Chen Hsong Holdings, which supplies plastic-injection moulding machines.
Manufacturers were already complaining last year about high oil prices pressuring profit margins. But the situation has worsened this year, with international oil soaring to US$62.89 per barrel yesterday from US$42.12 per barrel on January 3.
Hong Kong-listed Chen Hsong has seen 'quite a few' customers delay orders for its machines, executive director Stephen Chung Hau-leung said yesterday.
'Our customers are very unhappy. The high oil prices have increased their costs. A lot of them are seeing very little profit because of it, and it has in turn affected their liquidity.'
The toys industry, where a significant portion of costs is derived from plastic resins made from oil, has been particularly hard hit, Mr Chung said.
'Things have gotten worse,' said Wong Tit-shing, managing director of Jetta, one of Hong Kong's largest contract toy manufacturers.
'Profit margins are getting squeezed - this is a universal truth in Hong Kong's toy industry.'
Tony Wu Kam-bun, executive director of Smart Union Group, a Hong Kong toy manufacturer, estimated that average net profit margins of Hong Kong toy makers with factories in Guangdong will drop to 4 per cent this year from 6 per cent last year.
Another victim of high oil prices is the shoe manufacturing business which consumes various petrochemicals. Yue Yuen Industrial (Holdings), the world's biggest contract manufacturer of sports shoes, saw its net profit drop 3.8 per cent to US$152.3 million in the six months ended March, while its net profit margin was 10.3 per cent, down from 12.6 per cent net the previous year.
Although oil prices remain high, price volatility has been reduced, making it easier for Hong Kong-listed Yue Yuen to manage the impact of dearer oil by passing on part of the cost to customers, said the company's investor relations manager, Terry Ip Ming-chung.
So far, the plastic flowers and gifts industries have been less affected by the higher oil prices but Mr Chung warned that the impact soon will be felt by all manufacturers using plastic and petrochemicals.
Plastic and petrochemical prices generally lag oil prices by about two months, he said.
