MARKET DEVELOPMENT
Palm Oil Price Decline is Good News for Soap Makers
Palm Oil Price Decline is Good News for Soap Makers
03/09/2014 (Livemint) - The fall in palm oil prices is good news for Indian consumer companies which have been struggling with input cost inflation. Spot crude palm oil prices are down by 30.3% from their highest point in 2014, and down by 21.7% since the start of the year. Comfortable supply conditions in the vegetable oil complex are putting downward pressure on prices.
A recent report from the US Department of Agriculture on oilseeds talks about a 3.5% increase in the total output of major vegetable oils in 2014-15. Palm oil output is expected to increase by 6% and soybean oil by 4%. An increase in output not matched by an increase in demand is one reason for falling prices.
Another reason is the Chinese government’s crackdown on credit transactions using commodities such as copper and even palm oil as collateral. This is further adding to the downward pressure on prices.
However, while the current price is $620 a tonne, it may move up. Even in 2013, it had declined to sub-700 levels but saw a rebound. If the Chinese government eases financing curbs, prices could recover sharply. Weather-related risks too seem to have receded but could spring up again.
Till a reversal happens, consumer companies should benefit from lower prices. Many of the big firms buy forward, which means it may take time for falling prices to seep into input costs. But they may well use the expected savings in future costs, to implement a change in strategy. In the past, rising commodity prices were accompanied by a depreciating rupee, thereby magnifying the impact.
Soap producers will be among those to benefit. Earlier this year, import duties on palm-based derivatives that are used to make soap had been cut. A decline in the commodity price should lead to significant cost savings. This should give companies leeway to give offers in the form of more volume for the same price, or spend more on advertising.
Falling palm oil prices should be good news for companies such as Hindustan Unilever Ltd (HUL) and Godrej Consumer Products Ltd, and even ITC Ltd’s consumer goods business. In the June quarter, Godrej had said that the industry’s mass market category had seen lower sales growth compared with the premium categories.
Vegetable oils are also a key input for companies that sell packaged foods, such as Nestlé India Ltd and Britannia Industries Ltd. They too should see some savings on the input cost in the current fiscal, unless vegetable oil prices reverse trend very quickly. But in their case, costs of other inputs, such as milk, flour and sugar, have been increasing or have remained steady. So, the cumulative impact is what will determine whether they can really benefit from declining vegetable oil prices.
A recent report from the US Department of Agriculture on oilseeds talks about a 3.5% increase in the total output of major vegetable oils in 2014-15. Palm oil output is expected to increase by 6% and soybean oil by 4%. An increase in output not matched by an increase in demand is one reason for falling prices.
Another reason is the Chinese government’s crackdown on credit transactions using commodities such as copper and even palm oil as collateral. This is further adding to the downward pressure on prices.
However, while the current price is $620 a tonne, it may move up. Even in 2013, it had declined to sub-700 levels but saw a rebound. If the Chinese government eases financing curbs, prices could recover sharply. Weather-related risks too seem to have receded but could spring up again.
Till a reversal happens, consumer companies should benefit from lower prices. Many of the big firms buy forward, which means it may take time for falling prices to seep into input costs. But they may well use the expected savings in future costs, to implement a change in strategy. In the past, rising commodity prices were accompanied by a depreciating rupee, thereby magnifying the impact.
Soap producers will be among those to benefit. Earlier this year, import duties on palm-based derivatives that are used to make soap had been cut. A decline in the commodity price should lead to significant cost savings. This should give companies leeway to give offers in the form of more volume for the same price, or spend more on advertising.
Falling palm oil prices should be good news for companies such as Hindustan Unilever Ltd (HUL) and Godrej Consumer Products Ltd, and even ITC Ltd’s consumer goods business. In the June quarter, Godrej had said that the industry’s mass market category had seen lower sales growth compared with the premium categories.
Vegetable oils are also a key input for companies that sell packaged foods, such as Nestlé India Ltd and Britannia Industries Ltd. They too should see some savings on the input cost in the current fiscal, unless vegetable oil prices reverse trend very quickly. But in their case, costs of other inputs, such as milk, flour and sugar, have been increasing or have remained steady. So, the cumulative impact is what will determine whether they can really benefit from declining vegetable oil prices.