High prices cheer edible oil refiners

Riding on the back of an upsurge in vegetable oil prices, oilseed crushers and refiners anticipate better results in the oil year 2010-11 (November-October). Last year, these were under pressure due to extremely low capacity utilisation, on suppressed seed prices.

Dorab Mistry, director of Godrej International and an industry veteran, has forecast edible oil prices to remain firm for at least the next six months, due to supply shortage. Although, palm oil output in Malaysia and Indonesia, the world’s two largest producers, are likely to recover (by 500,000 tonnes in Indonesia to 22.5 million tonnes and by 2.2 mt in Malaysia to 17.2 mt) in 2011, the supply of seed will remain subdued, as most of this higher stock will be released into the market only next year.

“The period of greatest tightness will be between February and May 2011 and we need prices to rise now in order to reign in demand and to stimulate planting. At some stage in December–January, I expect RBD palm olein to trade at $1,250 FOB, with crude palm oil futures on the BMD (the Malay derivatives’ exchange) trading at M$3,600,” Mistry said. Currently, RBD palm olein is around $1,140 a tonne.

Soyoil is expected to rise by 5-10 per cent, to trade between $1,250-1,300 a tonne. Sunflower oil will maintain a premium of about $200 over soya oil prices and rapeseed oil prices, also to maintain a premium of $100-150 over soya oil. Palm kernel oil has already touched $1,650 CIF Rotterdam. Demand for fast-moving consumer products is very strong and it is quite possible that PKO prices will go close to an unprecedented $1,800 CIF Rotterdam. The outlook is the same for coconut oil.

“Higher oil prices will certainly put a pressure on margins, as a sudden rise in prices of edible oil lowers demand in countries like India, where most sales are done purely on a rupee basis, unlike the quantity basis in cities. Since the per capita growth of consumption is backed by the enormous rise in rural demand, a substantial price rise will surely hit the overall use of edible oil in India,” said Satyanarayan Agarwal, chairman of the Central Organisation for Oil Industry & Trade.

India’s annual production of edible oil is 6.5-7 million tonnes and consumption is 15.5 mt.

Atul Chaturvedi, CEO (edible oil) of Adani Wilmar Ltd feels the edible oil price rise would be comfortably passed on to consumers. Adani, producer of the Fortune brand of edible oil, has a million tonnes of vegetable oil refining capacity and 750,000 tonnes of crushing capacity daily.

The price rise does not necessarily mean the crushing or refining margin will increase and, hence, there is no need to add further capacity, said Chaturvedi.

India’s per capita consumption of edible oil has risen from 11 kg in 2008 to 13 kg today, thanks to low prices and rising disposable income for the middle class. “It does not necessarily mean that with the rise in oil prices, refiners will raise capacity. Since consumers have adaptability to absorb higher prices, we will comfortably pass it on,” said Siraj Choudhary, CEO (refined oils), Cargill India Ltd.

Last year, refiners reduced capacity to 35 per cent from the average 55-60 per cent due to lower margins.

Dinesh Shahra, Managing Director of Ruchi Soya Industries Ltd, said, “Considering the growing population, low per capita consumption, higher disposable income and the Indian way of cooking, we believe edible oil demand is poised to grow at a higher rate in coming years. The industry is faced by domestic supply constraints and, therefore, is dependent on imports to bridge the growing demand–supply gap. Ruchi Soya has envisaged expansion of refining capacities and exploring of domestic as well as overseas opportunities for sourcing secured and cost-effective raw materials.