The country waits with bated breath on the progress of COVID-19 virus into India’s entrails. As a country, we are said to be in third stage of the progress of the virus, where exponentially huge number of cases are predicted to erupt.
With this as the backdrop, we need to look at the edible oil industry. As recently reported in Oil World monthly release, “The Indian vegetable oil sector is receiving a double-blow this quarter from restrictions on palm oil imports at the start of the year and the subsequent emergence of the corona virus crisis which led to a 21- day nationwide lockdown this week. Vegetable oil stocks in India were relatively low in early 2020 and are currently depleted further to critically low levels”.
Although port stocks have not shown a significant dip, it is generally believed that the pipeline stocks are at critically low levels. This is fueling demand to some extent but hurdles in imports due to COVID-related restrictions have inhibited larger imports. The reduction in pipeline stocks are not posing a major challenge as consumer demand has also taken a hit.
The restriction to import of palm oil applied to refined palm oil (RPO) only. The crude variety, Crude Palm Oil (CPO) continued to be imported without any restrictions. Indonesia and Malaysia account for around 83% of the global production of palm oil. Malaysia has a huge refining capacity which is capable of refining its entire production of palm oil. Logically, it prefers to export RPO rather than CPO but it does also export CPO, based on demand from individual importing countries. On the other hand, Indonesian production of palm oil still increases by a significant quantum every year. Although Indonesia also promotes exports of RPO, a significant portion of its exports is in the form of CPO. The restrictions on RPO hit the Malaysian industry badly as India had become a major importer of RPO in 2019 due to certain anomalies in the import duty structure. India, on its part, imported CPO and had domestic refiners process it, thus increasing their capacity utilisation.
The nation-wide lockdown has had a knock down effect on almost all sectors and the vegetable oil sector is no exception. The available stocks were low. The disruption caused by the lockdown aggravated the situation briefly but the sector is perking up.
The edible oil sector comes under the purview of the Essential Commodities Act. Though the production continues, there are a host of difficulties. Factories are being allowed to function but have to follow strict guidelines for the safety of its personnel. Steps to be taken for hygiene, safety and isolation also pose challenges.
Ancillary industries, like packing materials, do not come under the Essential Commodities Act umbrella. Packaging requirements are undergoing a change in line with shifting demand patterns. In view of the restrictions on restaurants and other food outlets, people are cooking and eating at home more now. Previously, tins and other containers were more in demand due to institutional demand. With demand shifting more to domestic consumers, the demand for pouches has gone up. To procure large number of pouches at such short notice is also difficult. Transportation is also a stumbling block, especially as many state borders are sealed. It is difficult and time consuming to navigate these blocks.
The lockdown has seen massive exodus of people from cities to their villages. This has resulted in labour shortages which has impacted all industries, be it oil users like FMCG industries or even sugar mills, fertilizer plants, automobile manufacturers, amongst others.
In the midst of these problems, what is heartwarming is the resolve of the government to help the vegetable oil industry. On matters being taken up with governmental authorities, action has been swift. The promise by the Prime Minister to the nation that essential commodities would be available to the common man is being kept. Continued supply of vegetables, milk, medicines and food stuff is available to the common man. The wide network of Public Distribution System is being pressed into service to ensure a steady supply of staples to the general public.
Vegetable oil industry sources have noticed most refineries are not selling forwards till they clear out old commitments. This is understandable in the light of the fluid prevailing situation. It is just a matter of time that these players shed their inhibitions as signals are positive. Incoming ships with vegetable oil cargo are being allowed to offload without hassles. This is in direct contrast to the situation some time ago when importers were cagey about problems if imports were from Malaysia.
As COVID-19 is a ‘Black Swan’ moment in the history of the country, it was widely expected ‘Force Majeure’ clause might get invoked on many fronts. None of the major ports of the country like Kandla, Mumbai, JNPT, Goa, Mangalore, Kochi, Tuticorin, Chennai, Ennore, Visakhapatnam, Haldia or Kolkata have declared Force Majeure. As per latest directives from the Ministry of Shipping, Ports have been directed not to charge any penalty for both bulk and container consignments for delays on account of COVID-19. Several ports have advised that vessels coming from infected countries will require 14 days quarantine. Further to this directive, the division of countries into Group-1 and Group-2 and only asking for quarantine for Group-1 countries is no longer applicable. As this will delay the clearance of vessels to berth, Agents have proffered an appeal. The concerned authorities are expected to deal with this on priority on a case-to-case basis.
As the supply of edible oil has slowed down, price rise due to the principle of demand and supply is kicking in. Governmental authorities are said to be keeping a hawks-eye on price-movements. They are expected to intervene if they feel the price rise is unjustified and used as a ploy to increase profits. Decisive action has been seen from the government in the last few weeks and can be expected to curb profiteering.
The slowdown is seeing a negative growth in consumption. There have been lay-offs at the bottom of the pyramid. This is expected to see a degrowth in consumption of around 5-10%
In the midst of all the carnage, the resolve of the government to help is a silver lining. To help the small and medium sectors, a slew of measures have been introduced. Help with regard to working capital norms, deferring of repayment of loans for some months and other steps are positive ones. This will have a positive impact on many of the industries connected with the edible oil industry.
Another area where help for the industry has come is with the use of grounded passenger planes. While commercial passenger flights have been grounded, these planes are being used for movement of emergency and essential supplies to affected parts of the country. An out of the box idea worth applauding.
A recent UN report has opined that the Indian economy may not suffer as massively as some other economies. This is due to its large pool of domestic consumers. This will insulate the economy to some degree from global ravages. Only time will tell as India plods its way searching for light in these gloomy times.
Prepared by: Bhavna Shah
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