The days of cooking oil prices burning a hole in the pockets of the middle and lower-middle-class of India looks set to ease.
The government on Wednesday directed the edible oil manufacturers to further cut the maximum retail price (MRP) of imported cooking oils by up to Rs 10 per litre within a week, and maintain a uniform MRP of the same brand of oil across the country. The move follows a fall in global prices of edible oils.
India imports more than 60 per cent of its edible oil requirements. Taking cues from the global market, domestic edible oil prices have been on fire in the last few months as Russia invaded Ukraine. Indonesia, the biggest exporter of edible oils globally, had imposed a ban on the export of certain edible oils due to a dire shortage and soaring prices. It later widened the scope of the export ban to include crude palm oil, which heightened the price volatility that the commodity was seeing. But Indonesia has now withdrawn the ban, thereby leading to a cooling down of edible oil prices.
Fall in edible oil prices
As global prices underwent correction, last month edible oil makers had cut prices by up to Rs 10-15 per litre last. Before that too, the retail prices were reduced taking cues from the global market. But larger geopolitical tensions are far from over. Adani Wilmar, selling edible oil under the Fortune brand, and Mother Dairy, the owner of Dhara, have already reduced prices. Dhara edible oils reduced its MRP by up to Rs 15 a litre across variants while Fortune edible oils saw a reduction in prices by Rs 10.
Contrary to the earlier held belief that the Russia-Ukraine war would not last long, it’s on its fifth month now. Ukraine supplies nearly half of the world's sunflower oil. This is over and above the 25 per cent that Russia supplies. The war has disrupted supply chains by interrupting shipments, resulting in the rise of cooking oil prices globally. Indonesia lifting the ban has brought some relief to the price volatility but it’s not completely gone.
“Still early to say whether the volatility is over in the medium term. But due to government intervention and softening of global prices and reduction of supply chain constraints, prices have reduced and are likely to further reduce in the coming months,” says Rajat Wahi, Partner, Deloitte India.
Will FMCG companies gain?
The increase in the prices of palm oil, a key ingredient for most fast-moving consumer goods (FMCG) companies, also resulted in surging input costs for FMCG companies. Correction in palm oil prices would mean good news for FMCG companies. Palm oil accounts for 50-60 per cent of input costs in soap. From skin care products to noodles, palm oil and its derivatives are the primary input in most FMCG products.
Soaring inflation over the last one year led to an increase in costs of several daily-use products. In order to survive pressure on input costs, FMCG companies passed on the price rise to consumers. While the rise in price helped these companies in maintaining margins, FMCG companies faced a slowdown in demand, especially in rural India.
Hindustan Unilever Limited (HUL) -- India’s oldest FMCG company – reported an increase of 10.4 per cent in net sales to Rs 13,190 crore due to aggressive price hikes in the first quarter of FY22. But the company’s growth wasn’t demand-driven, as volumes remained flat, indicating sluggish demand. Its gross margin compressed by 331 basis points year-on-year (YoY) while Dabur reported a 130 basis point YoY contraction in gross margins.
“For a lot of FMCG companies, raw material prices had shot up and that is now seeing a correction. This would definitely benefit their margins. Raw material prices coming down would add to their profitability margins,” says Avinnash Gorakssakar, head of research at Profitmart Securities.
Is consumer demand back?
While companies are set to benefit from falling input costs, it’s still too early to say whether consumer demand would see a commensurate revival. It’s unlikely that companies would pass on the benefit to consumers in a bid to revive demand. Rural demand is completely dependent on how good the monsoon is this year.
“Still early days for this (revival of consumer demand) as due to inflationary pressures and due to global supply chain constraints, FMCG demand is still seeing some headwinds - but with timely monsoons, commodity prices coming down, and support from the government, it should further boost sales in FMCG sector,” Wahi adds.