Edible Oils Industry in Pakistan

Presented By: Usman Khalid Javed Hasnain Tahir Hibba Bajwa Rana Ali Faizan Bisman Shaukat

Lahore School of Economics 11th November, 2011

Current Industry Analysis: In 2007-08, local production was recorded at 833,000 tonnes representing a share of 27.2% of total demand which was 3,062,500 tonnes. This represents a decline in domestic production (as a proportion of total demand) of 9.3% over the 4 year period. As total demand in 2009 was 2,846,000 tonnes, the difference between total demand and domestic production had to be compensated by importing 2,229,500 tonnes of edible oil (72.8% of total demand). The import bill of Pakistan increased from the yearly total of Rs.33 billion in 2004-05 to Rs.84 billion for the 9 month period between July 2008 and March 2009. During last two decades, Edible oil imports have shown a 14.5% annual increment and their share of Pakistans total imports has risen from 3.1% in 2000-01 to 4.2% in 2007-08. Apart from rising consumption of edible oil subjected to high population growth rate, lack of awareness amongst farmers, ignorance of policy makers regarding oilseed crops, technological deficiency in oilseed production and smuggling of edible oil to neighbouring countries (notably Afghanistan) serve as major deterrents to significant growth in domestic production of edible oil and vegetable ghee. Climatically, environment of Pakistan is believed to be conducive to cultivation of cottonseeds, sunflower seeds, canola seed and other edible seeds crops. Pakistan, instead of incurring a sizable import expense every year for import of palm oil seeds and other oilseeds which it is deficient in producing must rather consider a more viable and cost effective policy of relying on its indigenous varieties of oilseeds ranging from cottonseed crop (constitutes up to 50-60% of total domestic production) to others such as sunflower, olive, rapeseed etc. Also canola cultivation can be done successfully in Pakistan and it can further strengthen the growth of domestic oilseed production. Comparative yields of cottonseed in kg/hectare for some major cottonseed growing countries are: China 3,978, Laos - 2,890, Iran - 2,000, Pakistan - 1,867, Thailand - 1,461, Indonesia - 1,364, Vietnam - 1,069, Developed countries - 3,297, Asia Pacific - 1,869, and Rest of the world - 1,690.

Strategy Formulation: Its the stage of strategic management that involves the planning and decision making that lead to the establishment of the organizations goals and of a specific strategic plan. Hence, while considering the edible oil industry it is important to comprehend that where exactly is the

industry going? The planning of achieving the objectives set out after this will need to be established here. Now, the major focus of the industry is to switch the consumers from desi ghee and vanaspati ghee to vegetable cooking oil. Furthermore, in order to achieve this, the stressing factor of the industry would be on the importance of health. By increasing awareness about this feature the industry will be able to create a certain value for its product amongst the consumers and increase their market share. Business Model: A business model describes the rationale of how an organization creates, delivers, and captures value (economic, social, or other forms of value). The process of business model construction is a part of business strategy. For the oil industry the model elaborates:

Hence, the rationale on how the industry will need to grow and increase profitability and market share is based on the importance of health. The vegetable oils are rich in monounsaturated and polyunsaturated fats. Whereas desi ghee and vanaspati ghee are saturated. By contrast, saturated and trans fat consumption increase the risk of heart disease and artery blockage. Value Analysis: A "value map" relates prices to a customers perceived product and service benefits. A value map also helps identify opportunities for increasing prices and thus improving profitability.

Furthermore it also helps identify areas where a company is vulnerable and needs to improve its performanceor, for that matter, where its competitive prospects are so poor that exit may be warranted. Hence, considering the edible oil industry we have established that the focal point of the value creation if on health. The more the industry will be able to create value about the health factors, the more value will be created and inevitably lead to improvement in profitability.

Porter 5 Forces Analysis: Threat of new entrants The oil industry is structured in an oligopolistic nature. Hence, there are a few large players in the market. As they have been operating for a longer period of time, for them to create barriers for new firms would be very easy. Hence the threat of new local entrants would not be a huge factor of worry. However considering the amounts of oil that is imported this feature is critical. As in order to perform efficiently the oil industry will need to focus on having the amounts of edible oil imported decreased.

Threat of existing rivalry The existing rivalry amongst firms is such that there are 5 major players in the market. Namely they are: 1. Dalda 2. Habib Oil 3. Associated Industries 4. Wazir Ali Industries 5. Kashmir Edible Oils

Threat of substitutes Considering the types of substitutes available in the edible oil industry the three major materials are desi ghee, vanaspati ghee and vegetable oil. To understand how they operate we see what the consumption pattern of each is. The two differentiating factors are based on geographies; urban and rural. The following if the consumption pattern in all over Pakistan.

Bargaining power of buyers Bargaining power of buyers is a considerable threat for the oil industry. As there are many competing brands are available in the market. It is necessary for each company to satisfy their customers as far as price and quality is concerned. Otherwise the customers will switch to other brands or other forms edible oils.

Bargaining power of suppliers

Here the raw material is provided mainly by imports, Pakistan being the major importer of soybean, palm oil and tallow. These imports are in the form of crude oil which is further processed inside the country into refined cooking oil and vanaspati ghee. Here value is added to the crude oil imported from countries like Malaysia by further processing it. Hence considering the suppliers (imports, farmers), their bargaining power is substantial. Swot Analysis: Strengths:

Largest palm oil importers in world Cotton seed (Pakistan is the 4th largest producer) Launched of the various initiatives by government to promote cultivation of oil seeds crops

Large capacity of oil seeds processing sectors like extraction and refining sector

Weaknesses: The Malaysian government decision to export only process farm oil bound Pakistan and effect on edible oil industry Technical problems with cropping pattern, high production cost and inadequate seed technology Unsupportive government pricing policy continued to favour crops like cotton, weed over oil seeds Current research and development facilities in oil seed agriculture remain underdeveloped Opportunities: Changing consumer taste based on health considerations, allowing new entrants in the market

The elimination of custom duties on oil seeds imports

Threats: Illegal practices of making of Vanaspati Ghee Malaysia as a major competitor of Pakistan in edible oil industry

Internal Factor Evaluation Matrix(IFE) Strengths Weight Rating 3 3 3 Weighted Score 0.15 0.30 0.30

Largest palm oil importers in world 0.05 Cotton seed (Pakistan is the 4th 0.10 largest producer) Launched of the various initiatives by government to promote cultivation of oil seeds crops Large capacity of oil seeds processing sectors like extraction and refining sector Weaknesses The Malaysian government decision to export only process farm oil bound Pakistan and effect on edible oil industry Technical problems with cropping pattern, high production cost and inadequate seed technology Unsupportive government pricing policy continued to favour crops like cotton, weed over oil seeds Current research and development 0.10 0.10 0.20 0.30 0.05 0.10

4

0.20

2

0.60

2

0.40

1

0.10

2

0.20

facilities in oil seed agriculture remain underdeveloped Total Analysis of IFE Matrix: As the weighted average is 2.25 which is a less than the average ratings of 2.5. The company has more weaknesses than strengths. 1.00 20 2.25

External Factor Evaluation Matrix (EFE) Opportunites: Changing consumer taste based on health considerations, allowing new entrants in the market The elimination of custom duties on oil seeds imports Threats: Illegal practices of making of Vanaspati Ghee Malaysia as a major competitor of Pakistan in edible oil industry Total 1.00 10 2.3 0.30 2 0.60 0.40 2 0.80 0.10 3 0.30 Weight 0.20 Rating 3 Weighted Score 0.60

Analysis of EFE Matrix: As the weighted score is less than the average of 2.5, thus the company is availing less opportunities and facing more threats.

Product Planning: It is the ongoing process of identifying and articulating market requirements that define a products feature set. In the edible oil industry the three main products that lie are desi ghee, vanaspati ghee and vegetable oil. In order to make vegetable oil successful the strategy to be adopted would be to focus on the factors of health. To make the consumers more aware of the advantages of this and to highlight the health risks associated with the other types of oils. Assessing Market Opportunities: The opportunities in this industry again lie with the health awareness. As this feature can help switch consumers from the traditional desi ghee and vanaspati ghee to vegetable oils. As still the rural areas of Pakistan use these ghees, so to change them the awareness of the health risks need to be highlighted immensely. Moreover, as the government removed the duties on the imports in 1997 which gave way to a lot of trading was also a huge opportunity for the industry to grow. Marketing Channel Strategy:

The channel was such that the raw material was provided mainly by imports, Pakistan being the major importer of soybean, palm oil and tallow. These imports were in form of crude oil which is further processed inside the country into refined cooking oil and vanaspati. Later the value is added to the crude oil imported from countries like Malaysia by further processing it. The by product from this is then further used as a raw material by soap industries, here these manufacturers become suppliers to the soap industry. Oil is also extracted from cotton seed; Pakistan being one of the main cotton growers of the world has a lot of potential. Oil is extracted from the cotton seeds mainly by use of expellers, which extract almost 70% of the oil. This process can be made efficient by using solvent extraction units which have minimum wastage. The waste material from cotton seed oil, also known as oil cake is used to feed live stock. Live stock industry is big in Pakistan, most of the rural population makes their living by keeping live

stock and bigger meat companies keep live stock in large amounts, these companies hence make an attractive market for the oil cake industry. Furthermore, finally in the end the consumer was reached.

Communication Planning: Communication planning is the art and science of reaching target audiences using marketing communication channels such as advertising, public relations, experiences or direct mail for example. It is concerned with deciding who to target, when, with what message and how. Hence will comprehending the strategy for the industry the advertising policy should be based on providing information. Attracting the consumer by informing them about the benefits of using vegetable oils based on health factors. And moreover, by showing the disadvantages and health risks associated with desi ghee and vanaspati ghee.

Other concepts applied:

The splintering of supply is every essential. The industry faces a threat from the suppliers as the farmers and the importers can manipulate the price. Hence the division of the supply for the industry is key so that the risk is spread over amongst the different suppliers.

Now considering the industrial marketing environment and the interface level. As the interface level involves those key participants who immediately interface with an industrial firm in facilitation of production, distribution and purchasing. Here the farmers complained of being manipulated by large importers. As exploitation was enabled by the absence of government purchase centers, at the interface level between farmers and processors.

Lastly, in order to achieve better productivity and decreasing the logistics and distribution costs the industry will need to focus on how their objectives need to link with the

objectives of their suppliers. And furthermore how the steps that do not add value to the supply chain need to be eliminated.

EXHIBITS

Exhibit 1: Monthly per capita consumption in Pakistan by Income Quintile 2001-02 1st Urban Desi Ghee Veg. Ghee Cooking Oil Rural Desi Ghee Veg. Ghee Cooking Oil AllPakistan Desi Ghee Veg. Ghee Cooking Oil 0.01 0.51 0.01 0.02 0.60 0.03 0.03 0.65 0.05 0.04 0.71 0.09 0.09 0.73 0.26 0.04 0.64 0.09 0.01 0.51 0.01 0.02 0.61 0.01 0.04 0.66 0.02 0.06 0.74 0.04 0.14 0.84 0.09 0.05 0.66 0.03 0.00 0.49 0.03 0.00 0.56 0.09 0.00 0.61 0.13 0.01 0.65 0.19 0.03 0.60 0.45 0.03 0.59 0.23 2nd 3rd 4th 5th Overall

1st = Lowest 20% income level 5th = Highest 20% income level This exhibit merely shows the disparities in consumption due to disparities present in income levels amongst the urban and rural divide. In the urban areas, you can see that the lowest 20%

population by income level consume the largest quantities of vegetable ghee, while amongst the highest 20% population by income level, both vegetable ghee and cooking oil is consumed at high levels. In the urban areas, consumption of desi ghee is now minimal. Coming to the rural areas, comparing the levels of desi ghee consumed, even today consumption levels are existent. Consumption of cooking oil, amongst all income levels in the rural areas is similar to the consumption levels of desi ghee in urban areas; minimal. In the rural areas, however, consumption of vegetable oil is extravagant as compared to the alternatives present. This condition is similar to the consumption patterns of vegetable oil in the urban areas. Overall, the exhibit shows that the consumption of vegetable ghee, till date, is the highest while the consumption of desi ghee has decreased over the years drastically. This shows a change in consumer trends. The next exhibit, goes on to show how drastically the consumption of edible oil increased in Pakistan from the year 1970 to 2002. A couple of factors play an important part in this increase in demand which include the growth in per capita income and population outburst. Exhibit 2 shows that edible oil consumption in Pakistan expanded at a rapid rate over the last three decades, multiplying by over six times! Exhibit 2: Edible Oil Production and Imports Years 1970-71 1980-81 1990-91 1997-98 1998-99 1999-00 2000-01 2001-02 Annual Consumption (millions kg) 316 972 1616 1898 2098 1746 1979 1994 Population (millions) 65.3 84.3 110.8 131.5 134.5 137.5 140.5 146.0 Per Capita Consumption (kg) 4.8 11.5 14.6 14.4 15.6 12.7 14.1 13.7

Now this exhibit shows the mere degree of expansion in the consumption of edible oil from 1970 to 2002. When you look at the annual consumption column, you will see that the level of consumption increased throughout the years, the highest being in the year 1998-99. There is no proper pattern to the increase in production and levels rise as per the demand for products. Two

factors have been held responsible for this increase in consumption levels; population and income levels. The next column of population shows that population has been rising since the year 1970, till today and if these levels keep on rising like this, the demand for edible oils will perhaps never be satisfied in the future. The third column, the per capita consumption, shows the increase in consumption due to an increase in the income levels. You will see that after the year 1970, there was a drastic increase in the level of per capita consumption showing that demand for edible oils shot up after this year and has been increasing ever since. The next exhibit shows how the Pakistani government, catered to this ever increasing demand of edible oil. Exhibit 3 indicates that the consumption growth of edible oils in Pakistan was largely sustained by increasing imports. It states that the total import volumes increased rapidly, along with per capita consumption growth in the 1970s and 1980s, before stabilizing in the 90s. However, even during this later period of stability, the breakup of edible oil imports changed dramatically. Exhibit 3: Edible Oil Imports and Production Domestic Production Quantity Edible Oil Imports Value % of Total Import 1970-71 1980-81 1990-91 1997-98 1998-99 1999-00 2000-01 2001-02 136 505 656 719 773 695 835 797 180.0 466.9 959.6 1178.6 1324.9 1050.9 1143.5 1196.8 7.5 5.6 9.4 28.3 30.6 20.4 16.6 20.1 1.4 2.6 9.0 33.3 40.5 21.4 19.0 24.0 Bill 3.8 4.9 5.3 7.6 8.7 4.0 3.0 3.8 36.0 53.5 171.1 436.3 466.0 533.8 627.0 634.6

Years

Price per unit

Pakistan Total Imports

You will see in this exhibit that production and quantities of imports rose at an increasing rate from 1970 throughout 2002, however you will see that the prices and values of these imports did not increase with the increase in consumption. In the scenario of prices, global factors come into play since globally there are various other exporters and producers of edible oil such as

Malaysia, United States, Brazil and Indonesia which are the key players of oil imports and exports in the global arena. In this exhibit you will see that somewhere after the year 1998-99 the production and quantity of edible oil imports stabilized somewhat. However, in the same years when you take a look at the percentage of total import bill, you will see that the figures in that column show drastic variations, which showed that the import breakup was varying as a result of varying prices per unit. Coming on to exhibit 4, this particular exhibit shows a comparison between the two major imports of edible oil; Soybean and Palm, in terms of quantity and value. Exhibit 4: Company of Pakistans Imports of Edible Oil Years 1985-86 1990-91 1995-96 1996-96 1997-98 1998-99 1999-00 2000-01 2001-02 Quantity (tones) Soybean Palm 239 576 272 688 158 984 199 858 145 1034 364 961 202 849 128 1015 34 1162 Value (Rs Billion) Soybean Palm 3.2 3.7 3.8 5.3 3.9 24.8 4.7 19.2 4.3 29.2 11.2 29.3 4.6 16.8 2.6 16.5 0.8 23.3

This exhibit shows how over the years, the import of Soybean has decreased, while the imports of Palm has increased greatly. Why is this so? When you take a look at the value column of these two imports, you will see that the value of palm is much higher to that of Soybean. This is merely due to the fact that palm as an import is much cheaper than Soybean. Soybean imports are expensive and costly and this is why importers have moved away and starting importing palm oil as a substitute. However, when comparing these two imports, Soybean is less harmful to the human body as it contains lesser saturated fats than palm, and due to these health oriented reasons, soybean is more expensive. However, keeping the cost factor in mind and giving it more preference, Pakistan has become one of the largest palm oil importers in the world. Other developing countries, for whom price is an overriding purchase factor, are also large importers of palm oil. On the other hand, industrialized countries like the United States have been seen to import large quantities of Soybean due to its greater nutritional value.

Exhibit 5 shows dramatic fluctuations in world price of Palm oil and Soybean Oil ($ per ton). Importance of this exhibit lies in the fact that these two are Pakistan's major edible oil imports.

Exhibit 5: Edible Oils Industry in Pakistan

Commodity price chart (units): U.S. dollars per metric ton 10-year commodity price chart for Palm oil Units: Palm oil Category: Non Energy Commodities / Food / Fats and oils Compiled by mongabay.com using figures from World Bank Commodity Price Data. mongabay.com makes no guarantees about the accuracy of this graph.

Year

Palm Oil ($/ton)

1970 1980 1990 1995 1996 1997 1998 1999 2000 2001

260 584 290 527 466 507 671 436 310 286

The data/graph shows that immediately after year 1970, there has been a drastic increase in world price of Palm oil from $260 to $584 per tone. In this given span of time, a major price increase has occurred compared to the remaining price jumps in different years. The highest

price increase up till tear 2001 is $671 being recorded in year 1998. Such an increase is most likely to adversely effect economy of Pakistan as it is one of the two major imports of edible oil. This high price import bracket will later be put as a burden on consumers eventually ending up in producer surplus. If the country has to pay such a high price then price of this oil products will also be high in order to cover the cost. In comparison to the recent scenario after year 2001 another high price rise has been observed in year 2008 where world prices have reached up to $929.6 per mt. presently in this year 2011 prices show a very substantial increase and have jumped up to about $1183.1 mt. A real grave blow for the major importers such as Pakistan.

In case of Soybean the highest price increase observed from 1970 to 2001 is $628 in year 1998.After 2001 the highest price rise is observed in 2008 and then in present year that is 2011 where prices have jumped upto 1330.9 $ per mt

Year 1970 1980 1990 1995 1996 1997 1998 1999 2000 2001

Soybean Oil ($/ton) 307 594 447 524 484 524 626 427 338 354

96-97 Soybean Palm Sunflower Rapeseed Cottonseed Peanut Coconut Olive Palm Kernel Total Growth % 20.5 17.6 8.6 10.5 3.7 4.4 3.7 2.5 2.2 73.8 -

97-98 22.6 17.0 8.3 11.4 3.7 4.2 3.3 2.5 2.2 75.2 1.9

98-99 24.7 19.3 9.2 11.8 3.6 4.4 2.7 2.5 2.4 80.5 7.2

99-00 24.6 21.8 9.6 13.7 3.6 4.2 3.3 2.4 2.8 86.0 6.8

00-01 26.7 24.3 8.5 13.0 3.5 4.3 3.6 2.5 3.1 89.5 4.0

01-02 28.8 25.4 7.6 12.7 3.8 4.9 3.2 2.8 3.1 92.4 3.2

02-03 30.5 27.2 8.3 11.7 3.5 4.3 3.2 2.2 3.4 94.3 2.1

03-04 31.9 28.1 9.5 13.0 3.9 4.8 3.3 2.8 3.5 100.9 7.0

Exhibit 6 shows the world production of vegetable oils from year 1996-2004. It shows that overall vegetable oil production grew at an annual rate of 4.6% per year. Soybean remained the most popular vegetable oil globally however Palm oil being catching up the same pace. The more rapid growth in palm oil production and use was being driven by higher population growth rates in developing countries, which were the major palm oil consumers. However the recent scenario shows that the world production for 2008-09 stood for around 133 million tons while for 2010-11 it is estimated to be 145 million tons. Main Producers are Indonesia, Malaysia of palm oil whereas United States, China, Argentina and Brazil are main producers for soybean oil. Eu-27 and India are other main producers for vegetable oils. Palm oil has the biggest share in vegetable oil market with 2008-09 consumption standing at around 42.5 million tones followed by soybean oil at 36 million tons. Rapeseed, sunflower, peanut, cottonseed, coconut and olive are other major vegetable oils used worldwide. The international market for vegetable oil for 2008-09 was for around 56 million tons and increasing day by day. For 2010-11 it is estimated to be around 60 million tons. Palm oil is the internationally most traded vegetable oil with more than 60% of the total veg. oil traded in world market being palm oil followed by soybean oil. Sunflower, rapeseed and coconut oil are other oils traded in world market.

Indonesia (18 mmt in 2008-09) and Malaysia (16.5 mmt) are major exporters of vegetable oil. Argentina, Ukraine, Canada, United States and Brazil are other suppliers to world market. Asian nations exports palm oil while American countries major export is of soybean, sunflower and canola (rapeseed) oil. China (around 10 million tons in 2008-09) is the world's biggest importer of vegetable oil followed by India (9 mmt). EU-27, United States and Asian nations are other major buyers. Growth in vegetable oil consumption is driven mainly by economic expansion in developing countries. Vegetable oil consumption also is growing in the developed world, but primarily among premium oils with special nutrient profiles. Consumption of vegetable oils in the United States is among the highest in the world, although growth in oil use is below that of developing countries. The most rapid consumption and import growth has been in a few very large markets

including India, Pakistan, China, North Africa and the Middle East where price is a very strong competitive factor and where palm oil has a strong advantage

Exhibit 7 shows health implications of various types of fats. Unsaturated vegetable fats tended to increase the level of 'good' cholesterol or high-density lipoproteins (HDL), in the blood and lower the level of 'bad' cholesterol or low density lipoproteins (LDL). Saturated fats from dairy sources and Trans fats from vanaspati ghee had the opposite effect: they raised LDL levels.

Monounsaturated fats are found in high concentrations in canola, peanut, and olive oils; avocados; nuts such as almonds, hazelnuts, and pecans; and seeds such as pumpkin and sesame seeds. Polyunsaturated fats are found in high concentrations in sunflower, corn, soybean, and flaxseed oils, and also in foods such as walnuts, flax seeds, and fish Saturated fats come mainly from meat, seafood, poultry with skin, and whole-milk dairy products (cheese, milk, and ice cream). A few plant foods are also high in saturated fats, including coconut and coconut oil, palm oil, and palm kernel oil. Saturated fats boost total cholesterol by elevating harmful LDL. Like all dietary fat, saturated fat also raises the protective HDL Trans fatty acids, more commonly called trans fats, are made by heating liquid vegetable oils in the presence of hydrogen gas, a process called hydrogenation. come from commercially prepared baked goods, margarines, snack foods, and processed foods, along with French fries and other fried foods prepared in restaurants and fast food franchises. Trans fats are worse for cholesterol levels than saturated fats because they raise bad LDL and lower good HDL.

Exhibit 8 shows Nutritional Comparison of Various Edible Oils. It shows which vegetable oils which are healthiest more nutritious and good for health. This graph shows vegetable oils such as canola oil, sunflower oil, corn oil, olive oil and soybean oil were among the healthiest of vegetable oils with not more than 15% saturated fat content. In comparison to palm oil (51%

saturated fat)and coconut oil (91% saturated fat) were among the least healthy cooking oils. They were not significantly different from desi ghee, with its 68% saturated fat content. Coming on to Exhibit 13, organization chart of the oilseed complex, gives a detailed diagram of the situation that prevailed in Pakistan in regards of manufacturing oil seeds and importing them. It shows an expanded picture of the processes that started from the raw material to the final product available to the consumer. Pakistan was a major importer of raw material as well as processed edible oil. The domestic growth was minimum this was mainly due to problems in cropping patterns, high production costs and lack of seed technology. The processing industry or production was no better; it was growing at snails pace at a meager 2% per year. The exhibit gives an expanded picture of this processing industry. Where the raw material is provided mainly by imports, Pakistan being the major importer of soybean, palm oil and tallow. These imports are in form of crude oil which is further processed inside the country into refined cooking oil and vanaspati. Here value is added to the crude oil imported from countries like Malaysia by further processing it. The by product from this is then further used as a raw material by soap industries, here these manufacturers become suppliers to the soap industry. Oil is also extracted from cotton seed; Pakistan being one of the main cotton growers of the world has a lot of potential. Oil is extracted from the cotton seeds mainly by use of expellers, which extract almost 70% of the oil. This process can be made efficient by using solvent extraction units which have minimum wastage. The waste material from cotton seed oil, also known as oil cake is used to feed live stock. Live stock industry is big in Pakistan, most of the rural population makes their living by keeping live stock and bigger meat companies keep live stock in large amounts, these companies hence make an attractive market for the oil cake industry.

Exhibit 14: Vanaspati and Allied Industries Stock Trends

Year

Vanaspati general index of share price (1990=100) 87 103 74 59 53 55 55 52 45 100

Growth

Market capitalization

Growth

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 CAGR

18.5% -28% 20.5 10.4 3.6 1.4 -5.9 -13.1 120.1 1.6

389 612 427 328 309 321 345 390 248 227

57.4% -30.2% -23.2 -5.9 3.8 7.6 13.1 36.4 -8.6 -5.8

The situation In Pakistan continued to deteriorate, companies manufacturing and processing oil had increasingly high cost, due to the expensive imported raw material, this was mainly due to the stable volume of imports opposing the fleeting currency rates. These costs could not be covered by the output and profitability continued to decline. These declines in profitability are translated in share prices and capitalization which are falling every year. Companies faced huge losses and share prices declining lead them to face even more problems, people were hesitant to invest in the sector due to low returns and hence the growth of this sector remained negative through 1994-1997. Companies closed down as a result. The compounded annual growth rate reminded a mere 1.6% from 1993-2002, showing the very slow growth in this sector. This was also due to problems like cropping patterns, high production costs and lack of seed technology.

Exhibit 15: Vanaspati and Allied Industry: Public Listed Companies Company Symbol Market capitalization Associated ASIL 33.8 2051 Revenues Most recent years of data available 2001

ind Extraction Kakakhel ind Kashmir edible Kohinoor oil Maqbool co Morafco ind Sh.fazal rehman Suraj ghee Universal oil Wazir ali ind

EXTRA KAKA KEOM KOHO MAQC MOIL SSOM SURAJ UNIO WAZIR

15.1 47.3 120.8 3.7 44.6 5.2 100.7 6.7 6.1 228.2

Na 24 892 NA 285 Na 457 359 407 890

2003 2003

1995 1996 1990 1996 2003

The above given exhibit shows different government manufacturers that produce oil in Pakistan. The exhibit shows the amount of revenues they have generated and the most recent years of data collection. The latest data that is available in this exhibit is year 2003, showing that these values are quiet outdated and today many of these companies might not even exist due to the large amounts of privatization in this sector. From the exhibit associate Inc has generated the most revenue, associated industries is the largest manufacturer of vanaspati ghee in NWFP, with a market share of 40-45 % in NWFP. Associated industries are one the largest companies listed on Karachi stock exchange, with sales of about 2 billion. Associated industries manufacture banaspati ghee, cooking oil along with soap and detergents. This industry uses its by products from oil production in soap saving costs of raw material and diversifying its product range. Kashmir edible oil is the second largest revenue generating public company in Pakistan; it is the largest vegetable oilseed crushing companies of the country. The oil seed meals are sold domestically as well as exported as poultry feed. Making this company very important in generating foreign revenues. Kashmir edible oil is an important supplier to many cooking oil companies, who use its oil and brand it under their names when selling to the final consumer. Making it extremely important in the private sector companies, Kashmir also has its own brand. The increased sales in the recent year are due to increasing consumer health awareness; consumers today are largely concerned about their health and have shifted to vegetable oil such as canola oil.

Wazir ali industries is another prominent name In the public sector, and is the oldest vanaspati company listed. The company started as a private company which was made public in 1973 but was reacquired by the wazir brothers in 1992. Pakistan had grown to become one of the largest palm oil importers in the world. The market for palm oil was even more concentrated as Malaysia produced 50% and 30% was produced by Indonesia of the total world volume. The Malaysian government decided to export only processed palm oil known as refined, bleached deodorized palm oil instead of crude palm oil. This action hurt the processing industry in Pakistan. According to the exhibit the cost of import price per tonne for imported canola oil was the highest $450, followed by the imported soybean oil $400, and then imported rbd palm oil $355. The import cost per tone was the highest for the canola oil 28,670 as it is less harmful to the human body due to the less saturated fats presents in it, followed by the imported soybean oil 24,400 and the imported RBD palm oil 21,655. The custom duty per tonne imposed by the government was highest for the imported RBD palm oil 10,850 due to the high health risks. This act would discourage the import of the palm oil as it posed serious health hazards. The custom duty per tonne remained the same 9100 for the imported canola oil and the imported soybean oil. The sales tax was the highest for the imported canola oil 5,666, followed by the imported soybean oil 5,025, and then the RBD palm oil 4,876. The import incidentals was the highest for the canola oil 1,720 followed by the soybean oil 1,464 and then the RBD palm oil 1,299. The transportation costs remained the same 1586 for the three oils. The total cost before processing was the highest for the canola oil 48,045 followed by the soybean oil 42,731 and then the rbd palm oil 41,387. The processing cost into ghee remained same for the rbd palm oil and the soybean oil 6043, followed by the canola oil 3500. Total cost per tonne of ghee was the highest for the canola oil 51,545, followed by the soybean oil 48,774 and then the rbd palm oil 47,430. Exhibit 16: Cost of production of Vegetable Ghee from imported Edible Oils

COST

IMPORTED RBD PALM OIL

IMPORTED SOYBEAN OIL $400

IMPORTED CANOLA OIL $470

Import price per tonne

$355

Import cost per tonne Custom duty per tonne Sales tax Import incidentals Transportation cost Total cost before processing Processing cost into ghee Total cost per tonne of ghee

21,655 10,850

24,400 91,00

28,670 91,00

48,76 1,299 1,586 41,387

5,025 1,464 1,586 42,731

5,666 1,720 1,586 48,045

6,043

6,043

6,043

47,430

48,774

51,545

The price of oilseed imports was $239 for the canola oilseed but the domestic canola oilseed is not mentioned. The cost per tonne of oilseed was higher for the domestic canola 15,000 then was for imported canola 14,579. The custom duty for the imported canola was 802 but for the domestic canola had none. The import incidentals for the imported canola were 583 but the domestic canola had none. The cost of bags for packaging was 300 for the imported canola and 120 for the domestic canola. The transportation cost was 900 for the imported canola and 200 for the domestic canola. The total cost before extraction was 17,164 for the imported canola and 15,320 for the domestic canola. The extraction cost from oilseed remained the same 2,000 for the both. The net cost of oil extracted from 1 tonne of oilseed was higher 15,383 for the imported canola then was for domestic canola 13,820. Oil recovery from oilseeds was 40% for the imported canola and 35% for the domestic canola. The implied cost per tonne of oil was higher for the domestic canola 39,486 then was for the imported canola 38,460. The processing cost into ghee remained the same 3500 for both the canolas. The total cost per tonne of ghee was higher 42,986 for the domestic canola followed by the imported canola 41,960.

Exhibit 17: Cost of production of Vegetable Ghee from Oilseeds

COST

IMPORTED CANOLA OILSEED

DOMESTIC CANOLA OILSEED 15,000 120 200 15,320 2,000 13,820

Price Cost per tonne of oilseed Custom Duty Import Incidentals Cost of bags for packaging Transportation cost Total cost before extraction Extraction cost from oilseed Net cost for oil extracted from 1 tonne of oilseed Oil recovery from oilseed Implied cost per tonne of oil Processing cost into ghee Total cost per tonne of ghee

$239 14,579 802 583 300 900 17,164 2,000 15,384

40% 38,460 3500 41,960

35% 39486 3500 42,986

Exhibit 18: Kashmir Edible oil limited: Financial Highlights

Turnover Value 267.8 378.0

Turnover Change 41.2%

Gross profit Value 7.7 24.9

Gross profit Ratio 2.9% 6.6%

Operating profit Value 2.2 18.2

Operating profit Ratio 0.8% 4.8%

1996 1997

1998 1999 2000 2001 2002 2003

470.5 497.4 660.9 829.6 723.1 892.1

24.5% 5.7% 32.9% 25.5% -12.8% 23.4%

37.2 23.4 54.5 50.5 51.4 41.5

7.9% 4.7% 8.2% 6.1% 7.1% 4.7%

32.2 17.6 48.1 42.9 40.5 31.9

6.8% 3.5% 7.3% 5.2% 5.6% 3.6%

Kashmir Edible oils were one of the largest vegetable oilseed crushing companies in Pakistan. The edible oil was sold in bulk to various companies who then sold it to end consumers under their own brand name. The exhibit highlights the rapid sales growth the company had experienced in the last ten years. Sales growth had been driven by increases in average selling prices. From 1996 to 2003 the gross profit, operating profits and the turnover rose over the years. Increased consumer awareness about the health benefits of canola oil over palm oil was one of the major factors that drove their sales.