Palm Oil Scenario

Majyd Aziz

Human beings have been using palm oil since 3000 BC and, in fact, everyone consumes products that have palm oil component. Palm oil is considered the Common Man's Oil. Pakistan has become a major player in the global palm oil market since palm oil has a 71% share in the edible oil market. This is mainly due to low cost and high demand for hydrogenated oils (Banaspati) that has a share of 60% compared to cooking oil with share of 40%. Pakistan, being the fourth largest importer of palm oil, has become a hot competitive destination for major palm oil growing countries, Indonesia and Malaysia. These two ASEAN countries are the two dominant global suppliers overseeing four fifths of global production while responsible for nine tenths of world trade. Pakistani imports depict a marked preference for Indonesian palm oil, especially after Preferential Trade Agreement with Indonesia even though there is a Free Trade Agreement with Malaysia. The share of Indonesia in exports to Pakistan was 42%, 73% and 83% in 2013, 2014 and 2015 respectively, while of Malaysia was 58%, 28% and 17% in these three years.

The global production of palm oil is increasing at a brisk rate from 46.20 million metric tonnes (MMT) in 2010 to 62.40 MMT in 2015. The future projections are also positive, with experts predicting total production to touch the 90 MMT figure by 2025. The share of Indonesia in 2015 was 33 MMT while of Malaysia was a tad over 20 MMT. World palm oil exports increased sharply to nearly 48 million MMT in 2015, which depicts its huge demand. India imported 9.5 MMT while Pakistan bought 2.5 MMT. Pakistan's import of palm oil consists of Olien, Refined Bleached Deodorized Palm Oil (RBDPO), and Crude Palm Oil (CPO). Due to a limited refining base, Pakistan only imported 104,000 metric tonnes of Crude Palm Oil. Pakistan’s palm oil imports declined to $1.8 billion in Fiscal Year 2015 from $1.9 billion in the preceding year, mainly because of softening palm oil prices internationally. Although the prognosis is that Pakistan's palm oil demand would remain steady in the next few years, major players like prominent businessman Najib Balagamwala are convinced that a shift towards soybean oil would reduce the overall demand of palm oil.

At present, in Pakistan, the duty structure for palm oil products is as follows:

Palm Oil Duty Structure : Pak Rupees / Metric Tonnes
Palm Oil Product	Import Duty	Additional Duty	Sales Tax	Federal Excise Duty	Income Tax
Olien	7742.50	1%	16%	1000.00	5.5%
RBDPO	9230.00	1%	16%	1000.00	5.5%
CPO	6850.00	1%	16%	1000.00	5.5%

World experts and officials promote their own views and opinions on the present and future of the palm oil sector. Thomas Mielke of Oil World, Germany, a leading private authority on oilseeds, oil and meals, has a bearish outlook for palm oil prices in 2016. According to him, with prices of global commodities plummeting due to economic slowdown, geo-political risks, financial uncertainties, dwindling prices in the world equities market, weather dryness caused by El Niño resulting in crop damage, weak global energy prices, a slowdown in the Chinese economy, and a shift towards soybeans, the price of palm oil products would remain under pressure. Dorab Mistry, Director of Godrej International of India, also agrees on the effects of El Niño on crop production. He terms it as a "triple whammy of dry weather, biological low cycle, and seasonal low period". He also maintains that a huge demand for soybeans by China that could be as high as 84 MMT would also negatively influence overall palm oil demand.

Kanya Lakshmi Sidarta of Indonesian Palm Oil Association states that, "Indonesian palm oil is now trending towards a more diversified downstream product, contributing a significant 13% share of total export earnings". She further added, "palm oil results in stabilization of food prices and is an important source for renewable energy. Palm oil is considered to be the most competitive feedstock for sustainable biodiesel". The Indonesian government has mandated the use of palm oil to produce biodiesel for domestic needs. At present, over two MMT per year has been diverted towards producing bio-fuels. Paulus Tjakrawan of Indonesia Biofuels Producer Association estimated that bio-fuels demand in Indonesia would rise from 5.50 MMT in 2015 to nearly 8.0 MMT in 2016 and projections are that it would reach 24 MMT by 2025. According to him, the share of bio-fuels in producing energy is 20% in transportation, in industry, and in SME, agriculture, and fisheries sectors while it is 30% in power generation.

Notwithstanding the estimates of Mr Tjakrawan regarding increased diversification of palm oil to produce bio-fuels, Mr Mistry sees a Catch-22 situation. He cautioned that, "the main determinant of the success or otherwise of the biodiesel mandate will be the price of Gas Oil or Mineral Diesel in South East Asia. If the price of Gas Oil remains low around US$ 450 per MT and the local domestic price of CPO in Indonesia (without Export Tax ) rises to US$ 500, then it will require a subsidy of US$ 160 per MT to make biodiesel workable. If the price of CPO rises to US$ 550, the subsidy required would be a massive US$ 210 per MT. That will reduce the tonnage of biodiesel that can be subsidized and therefore consumed. So it can be said that the biodiesel program has an in-built bias towards the price of mineral diesel and also has a self-correcting mechanism."

The foreseeable global position is that palm oil, although universally accepted as a much-desired commodity, would be susceptible to many extenuating circumstances. The production can only be increased through allocation of more cultivable land in Indonesia and Malaysia, especially if they have to maintain their strong global presence. At the same time, major importing countries, like Pakistan, would hedge their bets and rely more on alternate crops, such as soybeans. A strong indication is that imports of soybeans that were about 9,000 MT in 2014 shot up to 580,000 MT in 2015 despite increased imports of palm oil products. It is now imperative that the Pakistan Vanaspati Manufacturers Association, All Pakistan Solvent Extractors Association, Pakistan Edible Oil Refiners Association, and relevant indentors, importers and facilitators, agree on a joint harmonious and institutionalized approach, so that not only government policies are rationalized for promotion of the edible oil industry, but also to promote a favorable, efficient and formidable position of Pakistan as a major global player. 

Reliance on imported Edible Oil

Majyd Aziz

PAKISTAN is primarily an agriculture country. However, the agriculture mix is heavily based on cotton, wheat, maize, rice, and sugar. Notwithstanding the importance of these crops in the farmland, the unwillingness of agriculturists to branch out to other crops is blatantly evident. Pakistani farmers are not keen to forcefully address edible oil crops despite the growing demand for these products. Hence, Pakistan depends on huge imports to cater to the local needs.

The reluctance to develop a strong base to grow rapeseed, canola, and sunflower is basically due to considerations of profits, but it has also to do with bare utilization of modern farming practices. The farmers are comfortable with the traditional crops and would prefer to grow pulses rather than, for example, sunflower. This is evident from the statistics provided by Pakistan Oilseed Development Board for the last three years. The production of rapeseed for 2012-13, 2013-14, and 2014-15 was 216,000, 189,000, and 181,000 tons while the rapeseed oil produced was 66,000, 60,000, and 58,000 tons. The canola production of oilseed and oil has remained stagnant at 16,000 tons and 6,000 tons respectively. The production of sunflower oilseed during the above period was 244,000, 190,000, and 178,000 tons while oil produced was 95,000, 76,000, and 68,000 tons.

The above figures reflect the missed opportunities of crop diversification, demonstrate a massive dependence on imports, and reveal the inability of the policymakers to pro-actively support the farming community and convince them to grow these crops. The bureaucratic mindset to take the easy way out and rely on fast-track imports is never a prudent policy. The volatile global marketplace, the vagaries of climate, especially El Niño, the currency factor, and the inland transportation freight are factors that impact on the overall cost of imports.

The imports of rapeseed, canola, sunflower, and soybean seed is worth considering. Rapeseed/canola imports for 2013, 2014 and 2015 on basis of arrival were 534,384, 982,870, and 806,766 metric tonnes while imports of sunflower seeds went up from 185,985 to 193,186 metric tonnes and then drastically dropped to only 30,486 metric tonnes in 2015. However, soybean seeds imports commenced in 2014 with a negligible import of only 9,094 metric tonnes but shot up to 579,724 metric tonnes in 2015. This exhibits a strong preference for soybean by the solvent extractors in Pakistan.

The prime reason for the upsurge in soybean imports was the shift from rapeseed/canola to soybean. Najib Balagamwala, who spearheaded the imports and facilitation of soybean seeds, stated, "24 solvent plants shifted from canola because it had reached a saturation point resulting in negative profit margins from crushing. Today, the position is that Pakistani importers have contracted around 1.45 million metric tonnes of soybean. Of course, this shift led to a shortage of canola oil and sunflower oil as nearly 45% of the mills crushed only soybean seeds."

Rasheed Janmuhammad, a big name in edible oil, said, "there has been substantial increase in oilseeds into Pakistan every year, that is, 62.4% in 2014 compared to 2013 and 19.56% in 2015 compared to 2014". He added that "2015 has been the first year that Pakistan has embarked very aggressively on the journey of importing soybean due to quite weak global prices and the duty advantage over other oilseeds. This shift of buying soybean will ultimately reduce the import of other oilseeds like canola, rapeseed, and sunflower." He further disclosed, "the huge crop of edible oil and oilseeds all over the world has made the sellers do aggressive marketing and thus there is a glut of edible oils at the consumption stage. The case of Pakistan is worth considering. Domestic entrepreneurs have covered a reasonable quantity of soybeans during 2015 and sufficient coverage for their requirements for the first six months of 2015." Najib Balagamwala echoed this statement and said that over 32 Pakistani entrepreneurs visited Romania and Australia to study the oilseed business and firm up future deals.

Shakil Ashfaq, Vice Chairman, All Pakistan Solvent Extractors Association, lamented that "the growth of local crops has been disappointing, with less than 15% of the total edible oil demand being currently met through domestically produced oilseeds". He reasoned, "the support price for wheat being maintained by government is too high compared to international market and this has hampered the growth of oilseeds crops". He also added that "Pakistan is the 11th largest poultry producer in the world, with a production exceeding 8 million metric tonnes of poultry feed. With the recent trend among feed millers to increase soybean in the formulation, the demand for soybean is rising rapidly. However, the current inclusion rate for soybean meal in poultry feed is about 12% which is fairly low. Given that poultry is growing steadily at rate of 8%, there is a great potential for growth in crushing of soybeans."

The annual per capita consumption of edible oil in Pakistan is only 17 kg with total consumption around 3.70 million metric tonnes. Pakistan produces between 0.50-0.70 million metric tonnes and thus 2.60 million metric tonnes are imported. The total import bill for edible oil is about $ 2 billion while the imports of oilseeds are approximately $ 0.50-0.60 billion. Pakistan has emerged as a major global player in edible oil market. The production of soybeans in the world has increased much faster than that of other oilseeds. At the same time, the trend towards utilizing soybean in Pakistan would ensure ample supplies of imported soybeans, and it is predicted that this would ensure continuity and attractive prices. Najib Balagamwala estimated that he foresees imports of 2 million metric tonnes of soybean and 1 million metric tonnes of canola, rapeseed and sunflower, mainly due to industry stability and duty protection for the solvent extractors and oil mills.

It can be rightly said that the local farmer is not eager to switch to canola, rapeseed, or sunflower due to production and cost viability. Thus, dependence on imported soybean augurs well for the local solvent extractors. At present, the import duty is 2%, the Federal Excise Duty is Rs 400 per metric tonnes, sales tax is 6%, and advance income tax is 5.5%. It is proposed that these front-loading duties and taxes must be zero-based so that the consumers get the finished product at favorable rates and, at the same time, Pakistan would be in a position to export to neighboring countries. A cost-effective and efficient supply chain would be the ensuing result. Pakistan has the potential and expertise to excel and further develop the edible oil industry.