MARKET DEVELOPMENT
Shortage of Ghee Looming Over Punjab - Chairman PVMA
Shortage of Ghee Looming Over Punjab - Chairman PVMA
25/04/2016 (Business Recorder) - Arif Qureshi is the third-time Chairman of the Pakistan Vanaspati Manufacturer's Association and has been with the PVMA since 1987. He is the CEO of Mahboob Industries Pvt. - the producers of Shan Vanaspati and cooking oil. He is also the President of the Quaid-e-Azam Industrial Estate in the heart of Lahore.
BR Research met with Mr. Qureshi to discuss the ghee and cooking oil business in Pakistan and some of the problems being faced by this enormous industry. Below are edited transcripts of our scintillating discussion with him.
BR Research: Tell us about the Vanaspati industry in Pakistan? What is the difference between cooking oil and ghee?
Arif Qureshi: There are 120 registered units of PVMA in Pakistan. Around four million tons of ghee or cooking oil is made in Pakistan. The per capita consumption of ghee and cooking oil is 17 kg per year, which is the highest after the US.
RBD palm oil is hard oil - its melting point is higher. RBD palmolene is soft oil, it makes vanaspati ghee. Initially, only 10 percent of the population used cooking oil while 90 percent used vanaspati ghee, today, the elite class prefers cooking oil because it's less fattening. Its melting point is near 18, so it's easier for the body to absorb it.
In rural areas, the use of ghee is much higher. Right now, we've reached the point where 35-40 percent of the population uses cooking oil while 60-65 percent uses hard oil/ vanaspati ghee. In the next three to four years, I believe it can become 50-50.
BRR: What are some of the ingredients for each of these types?
AQ: Vanaspati ghee uses palm oil, palmolene, cottonseed oil, but cooking oil is just soft oil - either soybean oil, canola, or sunflower oil. There's no ratio involved, you can make it using any one of these. Nowadays, soybean oil is being used more in Pakistan as its price has dropped.
The soft oil is coming from Brazil or Argentina. The RBD (refined, bleached, deodorised) palm oil comes from Malaysia and Indonesia. Right now, we're importing around 2.6 million tons of palm oil and palmolene from these two countries.
BRR: What are some of the problems that manufacturers face?
AQ: The industry is declining in Punjab - we don't get gas. Sindh has this facility. In fact, over the past 3-4 years, the industry is increasing in Sindh. One of the biggest problems is that the oil we procure in Punjab is more expensive; the tankers that come in, they go back empty, so they charge for a two-way journey. The tanker mafia is so strong that we can't escape their grip, even if we want to. The SC couldn't do much about it either.
Another reason why Sindh has it better than us is because in Punjab, the provincial government has some regulations that restrict growth. One such instance is the misuse of implementation of certain notifications and regulations by lower staff and government officials. This is not business friendly, which is why the industry is shifting from Punjab - the other provinces are giving more facilities income tax wise, and gas supply wise, especially in KPK and Karachi. The flight is actually very rapid.
But the biggest issue is that Punjab government has fixed the retail price of ghee since April 10 of last year. It's not like this in any of the other provinces. This is an anticompetitive regime and it's against Section 4(a) of Competition Act that you fix the price and that too, individually for each brand.
BRR: How is this hurting the manufacturers?
AQ: Rs14 per kilo is the increase in cost of production due to the increment in palm oil price; the rate of palm oil was $600 back when the notification was sent, but today it's $730. The dollar was Rs102 then, and now it's Rs105. If we don't import for the coming months, how can we supply? Rajab, Shaban, and Ramadan are upon us and the demand spikes in these months. We need one million tons for all three months, and right now we don't have 150,000 in Karachi even. We're begging them to fix this. We have written to the Secretary Industries and the CM that there will be a shortage soon.
These notifications are wrong. Until you fix this, people won't import. It takes 45 days from opening the LC, loading, and voyage to reach the port. In 45 days, it'll be June. The voyage alone is 18 days. We need one million tons per month and right now we're running on the imports from the last couple months. We maintain 250,000 tons, but now it's less than 160,000 (April 14) and falling fast. There's no fresh import. The daily consumption is still 4,000 tons of palm oil, and in Rajab and Shaban it's going to be 5,000. We need to have at least two months' worth of stock at any given point.
BRR: Is the price regulation benefiting the consumers?
AQ: The shopkeeper or the wholesaler is getting the benefit of the notification, not the public. If you bring competition, it will bring down the rates automatically. Moreover, some manufacturers get a better price for their ghee through their own personal contacts and patronage.
Suppose my price has been notified at Rs137, while my competitor's is Rs150. I sell for Rs133, so the shopkeeper can make Rs4 profit. But when my competitor sells for the same, the shopkeeper makes much more than my dealer. So naturally, the shopkeepers won't opt for my product as much. The difference between the minimum and maximum rates is as high as Rs60 per kg!
Even when the palm oil was low, we operated in a competitive manner and lowered our price, but the shopkeeper still sold at a much higher price.
BRR: Tell us about the tax structure in the Vanaspati industry?
AQ: According to Section 148 subsection 8 for edible oil, our tax is in minimum mode. Other industries' taxes are adjustable; if they pay more, it gets adjusted. Ours isn't returned.
They charge us at the import stage. We pay a total of 33 percent in duties: Custom duties, RD, FED, in lieu of sales tax, value addition, RD, WHT not on income at import stage, insurance, PODB cess are all added followed by a 5.5 percent tax on all of this. We have told the authorities that if you impose this 5.5 percent WHT on us, it comes to 140 percent of our profit!
BRR: How many big brands are there in Punjab? What differentiates one brand of ghee/cooking oil from the other?
AQ: There are around 15 big brands in Punjab. Mostly people know what they want to buy - Dalda, Sufi, Shan, Kisan. However, the palm oil is imported, and it's the same all over. But moving down the value chain, the refining system, packing, advertisement, marketing make the difference. However, to answer your question, I think there isn't much difference between most brands in terms of quality. It's more or less standardised.
BR Research met with Mr. Qureshi to discuss the ghee and cooking oil business in Pakistan and some of the problems being faced by this enormous industry. Below are edited transcripts of our scintillating discussion with him.
BR Research: Tell us about the Vanaspati industry in Pakistan? What is the difference between cooking oil and ghee?
Arif Qureshi: There are 120 registered units of PVMA in Pakistan. Around four million tons of ghee or cooking oil is made in Pakistan. The per capita consumption of ghee and cooking oil is 17 kg per year, which is the highest after the US.
RBD palm oil is hard oil - its melting point is higher. RBD palmolene is soft oil, it makes vanaspati ghee. Initially, only 10 percent of the population used cooking oil while 90 percent used vanaspati ghee, today, the elite class prefers cooking oil because it's less fattening. Its melting point is near 18, so it's easier for the body to absorb it.
In rural areas, the use of ghee is much higher. Right now, we've reached the point where 35-40 percent of the population uses cooking oil while 60-65 percent uses hard oil/ vanaspati ghee. In the next three to four years, I believe it can become 50-50.
BRR: What are some of the ingredients for each of these types?
AQ: Vanaspati ghee uses palm oil, palmolene, cottonseed oil, but cooking oil is just soft oil - either soybean oil, canola, or sunflower oil. There's no ratio involved, you can make it using any one of these. Nowadays, soybean oil is being used more in Pakistan as its price has dropped.
The soft oil is coming from Brazil or Argentina. The RBD (refined, bleached, deodorised) palm oil comes from Malaysia and Indonesia. Right now, we're importing around 2.6 million tons of palm oil and palmolene from these two countries.
BRR: What are some of the problems that manufacturers face?
AQ: The industry is declining in Punjab - we don't get gas. Sindh has this facility. In fact, over the past 3-4 years, the industry is increasing in Sindh. One of the biggest problems is that the oil we procure in Punjab is more expensive; the tankers that come in, they go back empty, so they charge for a two-way journey. The tanker mafia is so strong that we can't escape their grip, even if we want to. The SC couldn't do much about it either.
Another reason why Sindh has it better than us is because in Punjab, the provincial government has some regulations that restrict growth. One such instance is the misuse of implementation of certain notifications and regulations by lower staff and government officials. This is not business friendly, which is why the industry is shifting from Punjab - the other provinces are giving more facilities income tax wise, and gas supply wise, especially in KPK and Karachi. The flight is actually very rapid.
But the biggest issue is that Punjab government has fixed the retail price of ghee since April 10 of last year. It's not like this in any of the other provinces. This is an anticompetitive regime and it's against Section 4(a) of Competition Act that you fix the price and that too, individually for each brand.
BRR: How is this hurting the manufacturers?
AQ: Rs14 per kilo is the increase in cost of production due to the increment in palm oil price; the rate of palm oil was $600 back when the notification was sent, but today it's $730. The dollar was Rs102 then, and now it's Rs105. If we don't import for the coming months, how can we supply? Rajab, Shaban, and Ramadan are upon us and the demand spikes in these months. We need one million tons for all three months, and right now we don't have 150,000 in Karachi even. We're begging them to fix this. We have written to the Secretary Industries and the CM that there will be a shortage soon.
These notifications are wrong. Until you fix this, people won't import. It takes 45 days from opening the LC, loading, and voyage to reach the port. In 45 days, it'll be June. The voyage alone is 18 days. We need one million tons per month and right now we're running on the imports from the last couple months. We maintain 250,000 tons, but now it's less than 160,000 (April 14) and falling fast. There's no fresh import. The daily consumption is still 4,000 tons of palm oil, and in Rajab and Shaban it's going to be 5,000. We need to have at least two months' worth of stock at any given point.
BRR: Is the price regulation benefiting the consumers?
AQ: The shopkeeper or the wholesaler is getting the benefit of the notification, not the public. If you bring competition, it will bring down the rates automatically. Moreover, some manufacturers get a better price for their ghee through their own personal contacts and patronage.
Suppose my price has been notified at Rs137, while my competitor's is Rs150. I sell for Rs133, so the shopkeeper can make Rs4 profit. But when my competitor sells for the same, the shopkeeper makes much more than my dealer. So naturally, the shopkeepers won't opt for my product as much. The difference between the minimum and maximum rates is as high as Rs60 per kg!
Even when the palm oil was low, we operated in a competitive manner and lowered our price, but the shopkeeper still sold at a much higher price.
BRR: Tell us about the tax structure in the Vanaspati industry?
AQ: According to Section 148 subsection 8 for edible oil, our tax is in minimum mode. Other industries' taxes are adjustable; if they pay more, it gets adjusted. Ours isn't returned.
They charge us at the import stage. We pay a total of 33 percent in duties: Custom duties, RD, FED, in lieu of sales tax, value addition, RD, WHT not on income at import stage, insurance, PODB cess are all added followed by a 5.5 percent tax on all of this. We have told the authorities that if you impose this 5.5 percent WHT on us, it comes to 140 percent of our profit!
BRR: How many big brands are there in Punjab? What differentiates one brand of ghee/cooking oil from the other?
AQ: There are around 15 big brands in Punjab. Mostly people know what they want to buy - Dalda, Sufi, Shan, Kisan. However, the palm oil is imported, and it's the same all over. But moving down the value chain, the refining system, packing, advertisement, marketing make the difference. However, to answer your question, I think there isn't much difference between most brands in terms of quality. It's more or less standardised.