‘International energy prices will not return to their pre-crisis levels in the foreseeable future’

Earlier this year, the Central Bank of Malta, in its economic outlook 2021-2024, predicted that inflation on the island is expected to soar to 2.7 per cent in 2022 – a significant increase, particularly when compared to the rise in 2021 of 0.7 per cent. This data is echoed in the figures produced by the National Statistics Office in recent months: in March 2022, the industrial producer price index recorded an increase of 6.61 per cent when compared to the same month in 2021, with inflation registered in all the main industrial groupings.

Moreover, the Retail Price Index (RPI, published in April 2022) as well as the Harmonised Index of Consumer Prices (HICP) bear testament to the trickle-down effect, with rises in production and importation costs being passed on to the consumer. Indeed, the annual rate of inflation in April was 5.67 per cent, compared to 4.43 per cent in March, with the largest increase registered in the food index, according to NSO figures published last month.

“The ever-increasing transportation charges and the shortage of raw materials are two main factors which are pushing prices up across the board,” Dr Marthese Portelli, Chief Executive Officer of the Malta Chamber of Commerce, Enterprise and Industry asserts.

She refers to an EY survey carried out in collaboration with the Malta Chamber, published in April, which sought to determine the situation for the local manufacturing industry, which “showed that 40 per cent of respondents experienced an increase of 25 per cent in their costs over the past recent months.” Moreover, while 70 per cent of respondents said they were not expecting a negative impact in terms of lower demands, “the same respondents were concerned about their competitiveness, in terms of their profitability and sustainability if costs continued to increase.”

Another major concern is the way fuel and electricity prices have shot up across the EU in the wake of the war on Ukraine, she says. “This astronomic rise is reflected in an increased production cost of raw materials and also in transportation costs,” she continues, going on to say that while the subsidisation on energy prices, rolled out by Government, is a positive development, this does not mitigate shipping and importation costs and, indeed, “one cannot do away with the fact that Maltese businesses still have to import raw material from abroad.”

Malta is more vulnerable than most to the vicissitudes in prices related to logistics. “We are small, actually, we are tiny. We are a 316 km² island with approximately half a million inhabitants. Due to our size, our insularity and our peripherality, we cannot have freight trains; we cannot have door-to-door truck delivery; our airfreight options are very limited, and the frequency of scheduled freight services is constrained by our small volumes. The ultimate result is that Maltese importers and exporters have to cope with irregular and unreliable transport schedules, characterised by high importation and transport costs, as well as disproportionate local charges,” she explains.

This situation is proving intractable for many of Malta’s businesses. “The food and manufacturing industries have been affected the most, with companies doing all they can to survive. Material shortage means that businesses only have three options – they can either replace materials or ingredients with other materials or substitutes (if at all possible), or import through other suppliers at higher prices, or even switch to a new product offering. However, whilst replacing an ingredient in a food item might be relatively easy, the same cannot be said for the replacement of material in industries that require a series of process testing and calibrations (such as the automotive industry),” she continues.

Businesses can only absorb some of these costs, she says, since profit margins keep getting tighter, thus forcing companies to revise their prices and pass on these extra costs – to some degree – to their clients and consumers. Dr Portelli acknowledges the support being given – through the aforementioned subsidies on energy, and subsidies to grain product companies impacted by Russia’s invasion of Ukraine – but underscores that more can be done.

However, “there is no clarity as to what will happen beyond that. What is clear is that international energy prices will not return to their pre-crisis levels in the foreseeable future. Some adjustment in food, commodity and transportation costs is expected in 2023 as inflationary pressure will inevitably dampen demand and suppliers will allocate additional resources to fill in lucrative market gaps. But until this happens, it will be a particularly tough time for manufacturers,” she concludes.

This feature was first carried in the Summer 2022 edition of Business Now magazine.