Edible oils, especially palm oil, are essential raw materials not only for the food industry but also for various fast-moving consumer goods (FMCG) companies. Palm oil derivatives are used extensively in personal care products such as soaps and cosmetics, as well as in food products like biscuits and snacks.
India witnessed a remarkable escalation in its edible oil imports, reaching a staggering USD 21.28 billion during the fiscal year 2022-2023. This more than doubled the figures reported in 2020, highlighting a growing reliance on imported edible oils to meet rising domestic demand.
Despite governmental strategies promoting local production, this substantial increase underscores the continuing challenge of securing a stable supply of edible oils domestically. Data shows that the volume of imports surged to 137 lakh tonnes in 2021, compared to 51 lakh tonnes in 2003, pointing to the mounting pressure on India’s self-sufficiency in this sector. The hike in edible oil prices, starting in late 2021, also significantly contributed to inflationary pressures within the food price index.
Government's Strategy: Import Duties on Edible Oils
To address these challenges, the Indian government recently announced hikes in import duties on both crude and refined edible oils. The central government notified this increase last Friday, aiming to curb imports and support domestic farmers by boosting their incomes. The import duty on crude soybean oil, crude palm oil, and crude sunflower oil has been raised to 27.5% from the previous 5.5%, while the duty on refined soybean, palm, and sunflower oils jumped to 37.5% from 13.75%.
The government's primary goal with this policy change is to shield domestic oilseed farmers from depressed prices, which have been lower than the minimum support price (MSP). As a result of these duty hikes, importers and companies heavily reliant on edible oil are expected to face increased costs, which will likely be passed on to consumers.
Impact on FMCG Companies and Consumers
The increase in import duties is expected to have a direct impact on FMCG companies, particularly those producing soaps, personal care products, and snacks. These companies rely heavily on palm oil and its derivatives, such as palm fatty acid distillate (PFAD), as crucial raw materials. Palm oil accounts for 12-18% of the raw material costs for companies like Hindustan Unilever (HUL), Britannia, and Nestlé.
For instance, HUL, which procures most of its PFAD requirements domestically, may be forced to raise soap prices by around 1.6% to protect its EBITDA margins. PFAD accounts for 12-13% of HUL’s raw material costs, so the impact of increased import duties will not be negligible. In contrast, companies like Godrej Consumer, which import PFAD directly, are expected to be less affected by these hikes. Since the import duties only apply to crude and refined edible oils, not to derivatives like PFAD, Godrej Consumer may avoid price increases for the time being.
However, for packaged food companies that rely on refined oils, such as Britannia, the impact will be more significant. Britannia, a major player in India’s biscuit industry, will likely have to raise its prices by approximately 2.5% to maintain its margins, as refined palm oil constitutes 18% of its raw material costs. Similarly, Nestlé, which uses refined palm oil for about 11% of its raw materials, may be forced to hike its product prices by 1.5%.
Snack manufacturers, which use higher quantities of refined palm oil (RPO), will experience sharper price increases. These companies face significant cost pressures, which will be reflected in product prices.
Edible Oil Companies' Response to the Duty Hike
Edible oil companies themselves are likely to implement large price increases in response to the duty hike. Some firms may have hedged their short-term requirements to mitigate immediate cost increases, but the overall impact on margins is expected to be transient. Normally, companies will pass on these cost increases to consumers after experiencing a slight margin compression for one or two quarters.
The Ministry of Consumer Affairs, Food, and Public Distribution has advised edible oil associations to maintain the maximum retail price (MRP) on oils until stocks imported at lower duties are sold. However, once those stocks are exhausted, the higher import duties will likely cause a jump in edible oil prices across the board.
Global Developments in the Palm Oil Market: Relief from Indonesia?
The global palm oil market, a key influencer of edible oil prices in India, could offer some relief. Indonesia, the world’s largest exporter of palm oil, plans to cut export duties on palm oil starting next month to support its farmers amid falling global demand. The country’s palm oil production is expected to decline marginally to 53 million tonnes in 2023 from 54.8 million tonnes the previous year.
In the first half of 2023, Indonesia’s palm oil production fell to 26.2 million tonnes, compared to 27.3 million tonnes in the same period the previous year. This decline, combined with reduced demand from major importers like China and India, has pushed exports down to 15.1 million tonnes in the first half of 2023 from 16.3 million tonnes in the previous year. Nonetheless, Indonesia continues to divert a portion of its palm oil production for biodiesel production, which is expected to increase to 11.5 million tonnes in 2023 from 10.64 million tonnes in 2022.
Despite these developments, palm oil prices remain high, with crude palm oil trading at around USD 1,008 per tonne in June 2023, up from USD 964 per tonne the previous year. Indonesia’s decision to cut export duties will be a significant relief for Indian importers, especially in light of the Indian government’s recent hike in customs duties.
Recommendations for Indian Edible Oil Importers
Diversify Import Sources: Importers should explore alternative sources of edible oils beyond traditional suppliers like Indonesia and Malaysia. Countries like Argentina, Brazil, and Ukraine also produce sunflower and soybean oils, which can help mitigate supply chain risks and cost fluctuations associated with palm oil. The top 10 Exporters of Palm oil are given below:
Leverage Trade Agreements: Importers should closely monitor developments in free trade agreements (FTAs) and other bilateral trade arrangements that could provide tariff relief on edible oil imports. Leveraging such agreements could offer significant cost savings.
Invest in Hedging Strategies: Given the volatility in edible oil prices, importers should consider adopting financial hedging strategies to mitigate the impact of price fluctuations on their business. Hedging contracts for crude and refined oils could help stabilise costs, especially during periods of significant price hikes.
Promote Domestic Oilseed Production: Collaborating with domestic farmers and investing in local oilseed production could help reduce reliance on imports. Supporting initiatives like contract farming for oilseeds such as soybeans and sunflowers can ensure a more stable domestic supply and potentially lower production costs in the long run.
Improve Supply Chain Efficiency: Importers can focus on optimising their supply chain logistics to reduce overall costs. By improving inventory management, reducing transportation expenses, and streamlining procurement processes, importers can offset some of the cost increases resulting from higher import duties.
Consumer Price Adjustment: While cost increases are inevitable, importers should aim to stagger price hikes to avoid shocking consumers. Offering smaller, incremental price increases over time may be more palatable to consumers and prevent sudden drops in demand.
Collaborate with FMCG Companies: Importers should work closely with FMCG companies to develop cost-sharing mechanisms or product reformulations that minimise the impact of higher edible oil prices. For example, using alternative oils or blending oils may help reduce raw material costs.
Conclusion
India’s growing reliance on imported edible oils underscores the need for a balanced approach to managing the country's edible oil supply chain. While the government’s move to raise import duties on crude and refined oils aims to protect domestic farmers, it presents challenges for importers and FMCG companies alike. By diversifying import sources, investing in local production, and implementing strategic price management, edible oil importers can navigate these challenges and continue to meet the growing demand for edible oils in India.
Interested in learning more?
Get access to our Detailed Edible Oil Market Report for in-depth insights into India’s edible oil imports, pricing trends, and strategies for staying ahead in this evolving market. Mail to dhriti.impexconsultant7@gmail.com.
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