How falling edible oil prices will affect consumers and FMCG companies

The days of cooking oil prices digging a hole in the pockets of India’s middle and lower class look set to fade.

On Wednesday, the government ordered edible oil manufacturers to further reduce the maximum retail price (MRP) of imported cooking oils by up to Rs 10 per liter within a week and to maintain a uniform MRP of the same brand of oil. oil across the country. This decision follows a fall in world prices for edible oils.

India imports more than 60% of its edible oil needs. Taking inspiration from the global market, domestic prices for edible oils soared in recent months when Russia invaded Ukraine. Indonesia, the world’s largest exporter of edible oils, had imposed an export ban on some edible oils due to severe shortages and soaring prices. He later expanded the scope of the export ban to include crude palm oil, which increased the price volatility the product was experiencing. But Indonesia has now lifted the ban, driving down edible oil prices.

Drop in edible oil prices

As world prices suffered a correction, last month edible oil manufacturers reduced prices by as much as 10 to 15 rupees per litre. Before that, too, retail prices had been reduced on the basis of the world market. But the larger geopolitical tensions are far from over. Adani Wilmar, selling edible oil under the Fortune brand, and Mother Dairy, owner of Dhara, have already reduced their prices. Dhara edible oils slashed their MRP by up to Rs 15 per liter across all variants, while Fortune edible oils saw their prices drop by Rs 10.

Contrary to earlier belief that the Russian-Ukrainian war would not last long, it is now in its fifth month. Ukraine supplies nearly half of the world’s sunflower oil. This is in addition to the 25% provided by Russia. The war has disrupted supply chains by interrupting shipments, driving up cooking oil prices around the world. Indonesia’s lifting of the ban has brought some relief to price volatility, but it has not completely disappeared.

“Still early to tell if volatility is over in the medium term. But due to government intervention and easing global prices and reduced supply chain constraints, prices have come down and are expected to further decline in the coming months,” says Rajat Wahi, Partner, Deloitte India.

Will FMCG companies win?

Rising prices for palm oil, a key ingredient for most fast-moving consumer goods (FMCG) companies, have also led to soaring input costs for FMCG companies. A correction in palm oil prices would mean good news for FMCG companies. Palm oil accounts for 50-60% of soap input costs. From skin care products to noodles, palm oil and its derivatives are the main input in most FMCG products.

Soaring inflation over the past year has driven up the cost of many everyday products. In order to survive the pressure on input costs, FMCG companies have passed on higher prices to consumers. While higher prices have helped these companies maintain their margins, FMCG companies have faced slowing demand, especially in rural India.

Hindustan Unilever Limited (HUL) – India’s oldest FMCG company – reported a 10.4% rise in net sales to Rs 13,190 crore due to aggressive price hikes in the first quarter of the year. fiscal year 22. But the company’s growth was not demand-driven, as volumes remained flat, indicating sluggish demand. Its gross margin compressed by 331 basis points year-on-year (YoY) while Dabur reported a 130 basis points year-on-year contraction in gross margins.

“For many FMCG companies, commodity prices have skyrocketed and this is correcting now. This would definitely benefit their margins. Lower commodity prices would increase their profit margins,” says Avinnash Gorakssakar, Head of research at Profitmart Securities.

Is consumer demand back?

While businesses should benefit from lower input costs, it is still too early to tell whether consumer demand would experience a commensurate recovery. Companies are unlikely to pass on profits to consumers in a bid to boost demand. Rural demand is entirely dependent on the quality of the monsoon this year.

“Still early for that (consumer demand recovery) as due to inflationary pressures and global supply chain constraints, FMCG demand is still seeing headwinds – but with opportune monsoons, lower commodity prices raw materials and government support, it should further boost sales in the FMCG sector,” adds Wahi.

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