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


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



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.

10

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


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.

11

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


Price Dynamics


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.

12

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


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.

13


14

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


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



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


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


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

19

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.

20

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.

21

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

mailto:[email protected]

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