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Rising oil prices threaten electronics price increases

Rising oil prices threaten electronics price increases

Rates of more than US$100 per barrel for six to 12 months would hurt the tech industry

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Rising world oil prices threaten to raise the cost of consumer electronics and slow development by forcing Asian manufacturers to spend more on transportation and raw materials, regional economists say.

Oil prices have been pushed up by unrest in the Middle East and the cost of crude for April delivery moved close to US$100 a barrel on Monday. That level it threatens to jack up transportation expenses, which account for roughly 20 percent of the cost of products made in East Asia, said analysts.

The cost of raw materials such as plastics for computer casing or chemicals for mobile phone printed circuit boards will also go up if petrochemical factories end up paying more for crude supplies.

Oil refiners or naptha crackers would pass on about 80 percent of their higher costs to electronics firms who buy from them, said Wai Ho Leong, regional economist with Barclays Capital in Singapore.

"I assume the oil price hikes would be passed through to end users," Tim Condon, chief economist with ING in Singapore. "Activity would slow because consumers wouldn't be parting with their money. Demand would go down, you'd see unwanted inventory accumulating, and you'd see product cutbacks and employment effects."

So far oil prices that have tested their highest since mid-2008 haven't cramped Asia's momentum in PCs seen during the Western year-end holidays and China's Lunar New Year, analysts say.

But if the prices stay above $100 per barrel -- and fresh violence in Libya could push them into that groove -- for six to 12 months, manufacturers will be pinched.

"There is already some moderation kicking in," said Joanna Tan, economist with Forecast Ltd in Singapore. "With the oil prices up, we could see more moderation. It really depends on how long it drags on."

A dent in general world consumer confidence driven by higher oil prices could reduce demand for electronics, prompting manufacturers to pull back on capital expenditures for development of new technology, said Tony Phoo, economist with Standard Chartered in Taipei.

Oil prices that topped $140 per barrel in 2008 contributed to a slowdown in the growth of India's PC market and compounded the woes of manufacturers elsewhere as the world economy struggled against fallout from the U.S. sub-prime mortgage crisis.

Electronics firms are not assuming business as usual this year but keeping a wary eye on the second quarter of 2011 for any signs that oil prices will stay high.

"Our attitude on this is that if (oil prices) cost us more it also costs our competitors more," said Tim Handley, deputy marketing manager at Taipei-based motherboard maker Gigabyte. "I think the consumers would see some of this."

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