Edible Oil - pacra.com
Transcript of Edible Oil - pacra.com
Edible Oil
An Overview
February 2021© The Pakistan Credit Rating Agency Limited1
Contents Page No.
Snapshot 1
Process Flow 2
Global |Oil Seed Production 3
Global |Oil Seed Trade 4
Global |Edible Oil Production 5
Global |Edible Oil Production 6
Global |Price Dynamics 7
Domestic |Overview 8
Domestic | Supply Side 9
Domestic | Demand Side 10
Domestic | Price Dynamics 12
Business Risk 13
TABLE OF CONTENTS
Contents Page No.
Financial Risk 15
Duty Structure 17
Rating Curve 18
SWOT Analysis 19
Conclusion 20
Snapshot
1
EDIBLE OIL | OVERVIEW
Source: USDA, WB
Edible Oil is an of essential food item for cooking and food preparation. The product is being consumed by almost all classes of society, although per capita consumption patterns vary across the globe.
Edible oil can be obtained from a number of plants. The most commonly used edible oil products are soybean oil, palm oil, sunflower oil and rapeseed oil. USA is the largest producer of soybean seeds in the world, Malaysia and Indonesia are largest exporters of Palm oil whereas India is the largest importer of edible oil.
Despite the decrease in growth of global consumption from ~4% in MY19 to ~1% in MY20. The global turnover increased by ~17 during MY20 due to the sharp increase in global edible oil prices during the period.
Description MY19 MY20Turnover (Oil) – Global (US$ mln) 140,094 163,327Turnover (Oil) – Domestic (US$ mln) 6,087 7,105Turnover per Capita – Global (USD) 18.4 21.2Turnover per Capita- Domestic (USD) 21.5 21.5Share in GDP- Global 0.16% 0.19%Share to GDP- Domestic (Nominal) 2.4% 2.8Growth Rate (Annual) – Global -5.3% 16.6%Growth Rate (Annual) – Domestic 13% 17%
Note: Global turnover is based on international prices of raw edible oil.“MY” is the period from Oct-Sep.
EDIBLE OIL| PROCESS FLOW
Refined Bulk Edible Oil
Seed Extraction Oil Refinery
Branded Oil
Oil Seeds
Process Flow
Source: PACRA Internal Database 2
Consumer
Packing UnitPoultry Feed
Production of Oil seeds
EDIBLE OIL | GLOBAL
Source: USDA, PACRA Internal Database
Global Oil seeds production was recorded at 576mln MTs during MY20 down by 3% YoY (MY19: 597mln MTs). A decline of almost ~18%YoY in USA crops led to drop in global production in MY20. This decline was majorly owed to supply chain disruptions being caused bythe Covid-19 lockdown, ongoing trade war between USA and China and high opening inventory levels in the USA.
Soybean seed is the main seed accounting for ~58% of global oil seed production during MY20 (MY19: 60%).
Opportunity created by low USA production was being utilized by Brazil, as the country increased its oil seed production and exportduring the MY20.
3
350 342358
337
70 75 72 6948 48 51 55
39 45 43 4517 19 19 20
50 52 52 51
0
50
100
150
200
250
300
350
400
MY17 MY18 MY19 MY20
Oil Seed Production (mln MTs)
Soybean Seed Rapeseed Sunflower Seed Cottonseed Palm Kernel Others
0
20
40
60
80
100
120
140
160
180
200
MY17 MY18 MY19 MY20
Oil Seed Production
United States Brazil Argentina China India Other
Oil Seed Trade
EDIBLE OIL | GLOBAL
Source: USDA 4
98.42
99.28
86.74
102.71
45.83
52.15
56.16
59.86
19.16
20.21
20.61
23.89
2.77
3.16
3.33
3.04
0 20 40 60 80 100 120
MY17
MY18
MY19
MY20
Top Importers (mln MTs)
Pakistan European Union Others China
63.37
76.45
75.22
92.47
60.08
59.32
48.7
47.04
34.85
36.24
32.71
38.82
7.88
2.79
10.21
11.17
0 10 20 30 40 50 60 70 80 90 100
MY17
MY18
MY19
MY20
Top Exporters (mln MTs)
Argentina Others United States Brazil
Global Edible Oil Production
EDIBLE OIL | GLOBAL
Global oil production was recorded at 207mln MTs during MY20 – a YoY growth of 2% (MY19: 203mln MTs).
Palm oil has the largest share in global oil production.
Growth in global oil production is expect to remain flat.
Source: USDA 5
0
10
20
30
40
50
60
70
80
MY1 7 MY1 8 MY1 9 MY2 0
Variant wise Oil Production (mln MTs)
Palm Oil Soybean Oil Rapeseed Oil Others
0
20
40
60
80
100
120
MY1 7 MY1 8 MY1 9 MY2 0
Country wise Oil Production (mln MTs)
China United States Malaysia Indonesia Others
Edible Oil Trade
EDIBLE OIL | GLOBAL
Source: USDA 6
38
38
40
38
15
14
16
14
11
11
12
12
8
9
11
13
3
3
3
3
0 5 10 15 20 25 30 35 40 45
MY17
MY18
MY19
MY20
Top Importer (mln MTs)
Pakistan China European Union India Others
30
29
33
29
22
22
23
26
17
18
19
19
6
5
7
6
6
6
7
7
0 5 10 15 20 25 30 35
MY17
MY18
MY19
MY20
Top Exporters (mln MTs)
Ukraine Argentina Malaysia Others Indonesia
Price Dynamics
EDIBLE OIL | GLOBAL
Prices of edible oil during MY19 were at their lowest in several years, a reflection of the slowdown in global demand for oils and proteinmeals.
Amid tight supplies and the supply chain disruptions caused by covid-19 lock down, soybean oil and palm oil prices was increased by 25%and 43% respectively during MY20.
7
2323
23
20
18
19
20
21
22
23
24
MY17 MY18 MY19 MY20
Closing Inventory Oil (mln MTs)
Source: USDA, PACRA Internal database
-
200
400
600
800
1,000
1,200
1,400
MY17 MY18 MY19 MY20
Price Trend (US$/MT)
Soybean Oil Sunseed Oil Palm Oil Rapeseed Oil
An Overview
EDIBLE OIL | DOMESTIC
• Revenue of Pakistan’s edible oil market was recorded at US$~7,105 million in MY20 registering a YoY growth of 17% (MY19: US$~6,087 mln).
• Local consumption was recorded at ~4.9mln MTs in MY20 up ~3% YoY (MY19: ~4.7mln MTs). This reflects that the growth in revenue was majorly contributed by a spike in prices. Average price of edible oil during MY20 was recorded at PKR~238/kg as compared to PKR~201/kg during MY19 (YoY Growth: 19%).
• With a per capita consumption of 22kg, Pakistan is the world’s 8th
largest consumer of edible oil.• The sector is highly dependent on imported oil seeds and palm oil to
meet local demand. Hence, the exposure to exchange rate and International price fluctuations is high.
Source: USDA, WB, IMF 8
Industry Snapshot
MY17 MY18 MY19 MY20
Revenue ( US$ mln) 5,169 5,388 6,087 7,105
Per Capita (US$) 25 25 28 32
Per Capita Consumption (Kg) 22 21 22 22
Share to GDP 2.1% 2.1% 2.4% 2.8%
Oil Seed Import (000 MT) 2,882 3,041 2,904 2,485
Palm Oil Import (000 MT) 3,070 3,079 3,266 3,396
Supply Side
EDIBLE OIL | DOMESTIC
Source: Ministry of National Food Security & Research, PBS, USDA
Local edible oil demand is met through both crushing of oil seeds and import of edible oil. Local industry relies entirely on imports to meet its demand of soybean seed whereas cottonseed demand is met through local
produce only. Meanwhile, rapeseed and sunflower seeds are both produced locally as well as imported.
9
3,31
8
3,55
2
3,29
2
2,90
0
200
225
346
410
75
90
144
145
2 2 2 2 MY17 MY18 MY19 MY20
Production (000 MTs)
Cottonseed Rapeseed Sunflower seed Soybean seed
1,60
0
2,17
9
1,99
7
1,70
4
1,18
0
821 907
781
102
41
- -
MY17 MY18 MY19 MY20
Import (000 MTs)
Soybean seed Rapeseed Sunflower seed
Demand Side
EDIBLE OIL | DOMESTIC
Source: Ministry of National Food Security & Research, PBS, USDA
Although Pakistan’s duty structure is designed to facilitate oilseed imports through reduced tariffs and fees to shift value addition tothe domestic industry but still the country is one of the world’s largest importers of refined palm oil.
Almost 70% of local demand during MY20 was met through imported palm oil. Amid supply uncertainties and increased demand of edible oil post covid-19 lock down, due to opening of restaurants and marriage
halls, the prices of palm oil increased by 15% since Dec-2020.
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MY20
(000 Mt) Palm Oil Soybean Oil Rapeseed Oil
Cottonseed Oil
Sunflower Oil Total
Consumption3,390 480 491 450 60 4,871
Import (000 MTs) 3,390 109 - 2 - 3,501
Proportion (%) 100% 23% 0% 0% 0% 72%
Local Production (000 MTs)
0 367 491 450 60 1,368
Proportion (%) 0% 76% 100% 100% 100% 28%
2,89
0
2,97
0
3,09
7
3,28
5
179
105
167
109
1 4 1 2 M Y 1 7 M Y 1 8 M Y 1 9 M Y 2 0
Import of Edible Oil (000 MTs)
Palm Soybean Sunflower
Demand Side
EDIBLE OIL | DOMESTIC
Being the essential food item, the demand of edible oil remainsstable (CAGR 1.5%).
During MY20 the local consumption of edible oil was recordedat 4.871 MMT up 3% YOY. Palm oil has largest share in overalledible oil consumption followed by soybean oil, rapeseed oiland sunflower oil.
Local edible oil market is divided into three segments: (1) Highend Brand (2) Middle Priced Brand and (3) Loose Cooking Oil.Prices of different brands vary depending on their quality.
The sector is highly dependent on imported palm oil as itconstitutes ~72% of total consumption in MY20 (MY: ~69%).Further, almost total demand of soybean seed and oil is beingthrough imports. Whereas, rapeseed and cottonseed is beingproduced locally.
The demand of the edible oil is expected to remain stable andexpected to increase in short term in coming Ramzan month.
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3,070 3,095 3,245
3,390
470 485 490 480
471 374 472 491 445
480 470 450
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
MY17 MY18 MY19 MY20
Edible Oil Consumption (000 MTs)
Palm Oil Soybean Oil Rapeseed Oil Cottonseed Oil Sunflower Oil
Source: Ministry of National Food Security & Research, PBS, USDA
Price Dynamics
EDIBLE OIL | DOMESTIC
Source: USDA, PBS.
Pakistan is heavily dependent on import of oil seeds and edibleoil to meet local demand.
Thus, exposure to exchange rate movement remains high. The increase in prices is passed on gradually to end consumers.
Consumers usually switch to low quality cooking oil in case ofsubstantial increase in prices. Thus, in order to retain theirmarket share, the local players can not increase prices beyondcertain threshold.
International stock of edible oil and oil seed is at historically lowlevel. Amid tight supplies, the prices of imported edible oil arealso expected to increase further and hence the local prices ofthe products.
Further, demand side push to prices is expected from anincrease in demand due to upcoming month of Ramazan.
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186 189
209241
2%
7%
19%
8%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
50
100
150
200
250
300
MY17 MY18 MY19 MY20
Retail Price of Cooking Oil
Price (PKR/kg) Change
EDIBLE OIL | DOMESTIC
Business Risk | Demand Side
Source: PACRA Internal database
The business risk of edible oil sector can be divided into operating risk and sales risk.
Operating Risk: This risk particularly refers to the difficulties relating to the operations of the edible oil players which can hamperthe profitability and performance of the sector. Although tariff structure of the country is designed in a way to promote localproduction of edible oil but still the major portion of demand is met through imports. Major input includes both local inputs andimported inputs although the proportion of local input is significantly low. Being highly dependent on imports, the inherent risk ofsupply chain disruption is high. The sector’s costs are therefore subject to exchange rate volatility and change in Internationalprices of oil seed and edible oil as well.
Sales Risk: This risk is focused on the demand side of edible oil. Being the essential food item, the demand of edible oil is expectedto remain stable. As mentioned earlier the edible oil consumers is being characterized in three segments depending on theirbuying power. So, incase of substantial increase in the price, consumers will switch to low quality brands, and vice versa. As theprices of edible oil is expected to increase in wake of increase in international edible oil prices, the sales risk of the individualcompanies is expected to increase.
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EDIBLE OIL | DOMESTIC
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Business Risk: Margins & Cost Structure
Source: PACRA Internal Database
Edible oil sector is characterized by low net margins as most suppliers sell imported cooking oil after packing with low value addition.Whereas, the companies involved in the crushing of seeds for edible oil production usually have better margins than their counterparts.
Owing to improved prices during FY20, gross profit margin increased significantly. Despite the increase in gross profit margin the operating margin remains flat owing to high advertisement and marketing expense.
Advertisement and marketing expense of the sector are high owing to high competition between local players. Net profit margin did not change much during MY20 and was recorded at 1.4% (MY19:1.3%).
Note: Calculations are based on financials of PACRA rated clients.
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
FY17 FY18 FY19 FY20
Margins
Gross Margin Operating Margin Net Profit Margin
EDIBLE OIL | DOMESTIC
Financial Risk Net working capital days of the sector were recorded at 143 days during
FY20, up ~19% YOY (FY19: 121 days).
Net working capital days increased due to higher inventory days. Thecompanies keep considerable inventory levels to meet demand duringlead time required to import inputs. The need to maintain back up stocksincreased during FY20 owing to supply chain destructions caused by covid-19 lockdown. Further, the increase in prices also led to increase in value ofclosing inventory.
Receivable days of the sector remained the same at 40 days during MY20(MY19: 40 days). Supplier usually sell their oil products at a credit of morethan one months.
Due to high reliance of the sector on imports, trade payable days of thesector are minimal which further increases the working capital needs.
Considering high inventory and receivable days and low support frompayable side, the funds requirement to meet working capital needs of thesector is high.
Source: PACRA Internal Database 15
-
20
40
60
80
100
120
140
160
FY17 FY18 FY19 FY20
Working Capital Cycle
Inventory Days Trade Receivable Days
Trade Payable Days Net Working Capital Days
Note: Calculations are based on financials of PACRA rated clients.
EDIBLE OIL | DOMESTIC
Financial Risk
According to SBP numbers, total outstanding debt of the sector wasrecorded around PKR 109,645 million at end Dec-20.
Short term liabilities constitutes major portion of the short termliabilities.
To finance the working capital needs, the companies resorts toshort term borrowing as the short term borrowing constitute 98%of the total outstanding debt. High reliance on short term financingis a depiction of aggressive working capital policy which increasesthe repayment risk.
Gearing ratio of the sector was recorded at 54% during MY20(MY19: 64%).
Source: SBP,PACRA Internal Database. 16
Note: Calculations are based on financials of PACRA rated clients.
96% 95% 96% 98%
4% 5% 4% 2%0%
10%
20%
30%
40%
50%
60%
70%
80%
0%
20%
40%
60%
80%
100%
120%
FY17 FY18 FY19 FY20
Debt Structure
Short Term Borrowing Long Term Borrowing Gearing Ratio
EDIBLE OIL | DOMESTIC
Duty Structure
Source: Federal Board of Revenue, USDA 17
Duty Structure
Description Oil Seeds RBD Palm Oil Palm Oil Olein
Custom Duty 3% PKR 10,700/MT PKR 9,050/MT
Duty Discount (Malaysia/Indonesia) - 15% 15%
Additional Duty 1% - -
Reg. Duty - PKR 50/MT PKR 50/MT
Federal Excise Duty PKR 400/MT PKR 1,000/MT PKR 1,000/MT
CED 16% 16%
Sales Tax 17% 17% 17%
The government abolished additional customduty on semi-refined oil during the period.Other than that regulatory structure of theindustry remains same.
Recently, The Pakistan VanaspatiManufacturers Association (PVMA) in apresentation sent to the ministry of industries,urged the government to rationalize the dutystructure of palm oil imports to supportvolatile edible oil market.
Prices are expected to stabilize after the palmoil harvest in March and April this year. Anygovernment action in form of temporarysuspension of custom duty will help stabilizethe market and will keep prices of edible oilduring Ramzan in-check.
EDIBLE OIL | RATING CURVE
Source: PACRA Internal data
PACRA rates five players of edible oilsector.
No change has occurred in the ratingsof the players since last review.
18
0
1
2
BBB+ BBB BBB-
Rating PACRA
EDIBLE OIL | SWOT ANALYSIS
Reduced interest rate Stability of exchange rate for raw
material Increasing population Vast distribution Local plantation of oil seed Reduced additional custom duty
High reliance on imports Huge working capital needs Lack of Required Regulation by the
Government of Pakistan Highly fragmented sector Low local value addition raw material costson levels
Stable demand High bargaining power of suppliers Well established dealership networks Important food ingredient Increasing income levels and restaurants Wide range of target market•Approx.40% market occupied by unorganized sector
Strengths Weaknesses
Threats Opportunities
Economic uncertainties Low barriers to entry Changing eating habits Poor Infrastructure High competition Tight global supplies
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Sector Outlook: STABLE
EDIBLE OIL | CONCLUSION
Being the essential food item, the demand of edible oil remained stable despite covid-19 lock down. In the long term, the increasingpopulation will sustain the growth, while in short term the demand is expected to increase in coming Ramazan month.
More than ~70% of local demand met through imported edible oil and oil seeds. Significant dependence on imported raw materialincrease the supply chain risk and exposure to exchange rate movements.
Prices of different variants of oil seeds and edible oil are at historical highs due to the supply chain disruptions caused by the covid-19lockdown and tight USA supplies. Prices will remain volatile amid supply concerns while the palm oil seed harvest during April andMay this year will provide necessary relief.
In line with international prices, the local prices of edible oil has been increasing sharply since June-20. With the expected increase ofshort term demand and tight international supplies, the local prices are expected to increase further until any intervention by thegovernment.
Due to non-availability of other alternative the major burden of expected increase in international oil prices will be borne by the endconsumers which will supports profit margins of local players.
Due to high inventory and payable days the working capital requirement of the sector is high. The huge reliance of the sector onshort borrowing to meet their working capital needs is a depiction of aggressive working capital management and hence increasesthe credit risk.
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EDIBLE OIL| BIBLIOGRAPHY
Research Analyst
Muhammad Nadeem SheikhCFA, ACCA
Contact Number: +92 42 35869504E-mail: [email protected]
DISCLAIMERPACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is notguaranteed. The information in this document may be copied or otherwise reproduced, in whole or in part, provided the source is duly acknowledged. The presentation should not berelied upon as professional advice.
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PACRA Database World Bank Data International Monetary Fund Pakistan Bureau of Statistics State Bank of Pakistan Federal Board of Revenue Ministry of National Food Security & Research The Economic Survey of Pakistan Food and Agriculture Organization of United Nations US Department of Agriculture