Did you think "oil"? Not surprising though. Import of crude sunflower oil has been a thriving business in India. However, with constant changes in its import policy and price fluctuations in international markets, questions are being raised over how lucrative this imports business remains.
Andres M. Molier | November 2016 Issue | The Dollar Business
If you are amongst those who doesn't comprise on both health and taste, chances are high that at this moment, a jar or bottle of sunflower oil will be found on your kitchen shelf. For, with its high smoking point, the slightly amber coloured sunflower oil is considered perfect for Indian cuisine. And not to say, the oil boasts of several health benefits, including its ability to strengthen the human immune system, lower cholesterol, protect against asthma, improve heart health,etc. Interestingly, for these very reasons, sunflower is today known more as a source of an edible oil , and less as a flower!
These are also the reasons why, over the last decade, India's import of crude sunflower oil has seen a massive jump of about 1,727% to touch $1,299.35 million in CY2015 (UN Comtrade data). In fact, industry experts are of the opinion that even if domestic production increases, imports will keep on rising, as lifestyle changes mean that India's consumption of sunflower oil will rise amid stagnant domestic production of the flower.
Despite the positive trend in sunflower oil consumption, sunflower seed production in India has not kept pace with demand. And this has led to more and more imports, mostly from Ukraine – the country today accounts for almost all of India's total imports of sunflower oil (CY2015; UN Comtrade data).
Though Indonesia (36%), Malaysia (23%), Argentina (17%) and Ukraine (13%) are the biggest source of edible oils for India, when it comes to sunflower crude oil imports, Ukraine has been enjoying a clear monopoly, boasting of a solid share of anything between 94% and 99% in India's total import of the product in the last five years. “A few years ago, import of sunflower crude oil used to only go up during festive seasons, but this trend is slowly changing. Because of constant increase in population, household income and standard of living, imports of sunflower crude oil is increasing in volume and it will only grow,” says a senior official from Athena Tradewinds, an exporter and importer of edible oils including sunflower oil.
According to a recent CARE Ratings report (released in Q3, CY2016), the current per capita consumption of edible oil in India is way below the global average – 14.4 kg per year as against 24 kg per year globally. And considering low domestic production (India imports nearly 67% of its edible oil requirements; the rest is being met from domestic production) and rising consumption, one can assume with a fair degree of certainty that the imports of edible oils, including crude sunflower oil, will only rise further.
While production remains worryingly inconsistent, the domestic consumption of edible oil has been growing at a rate of 7% annually over the last few years. In the early 1800s, Russia was the first country to commercialise sunflower oil. But, in case of India, sunflower as a commercial crop, was introduced only in 1969. Commercial cultivation took off in 1971, which reached its peak in MY2008, with a production of 1.4 MMT. However, since 2008 the production has been a downhill journey and, as per the government's advance estimates, 2016 could be the worst year in the recent past with respect to sunflower oil production.
"India sources 99% of its crude sunflower oil from Ukraine"
Sunflower, as a rain-fed crop, depends a lot on the monsoons and most of the farming areas are not properly irrigated. Bird damage in isolated areas is a serious concern, and marketing, infrastructure and expeller units are still not available in non-traditional areas. In addition, the minimum price support given to farmers isn’t properly implemented. Thus, farmers are shifting to alternate crops because sunflower is seen as a non-remunerative crop,” says Dr. M. Sujatha, Principal Scientist at Indian Institute of Oilseeds Research (IIOR). According to her, Ukraine has a legislation for stringent crop rotation, plus, their soil is highly fertile, which is quite the opposite of India. Nevertheless, IIOR is striving hard to develop superior sunflower hybrids with high yield, oil content and resistance to pests and insects.
In recent years, Karnataka and Andhra Pradesh have emerged as some of the largest producers of sunflower cro in India, followed by Maharashtra, Bihar, and Orissa. But for a country that consumed over 1.8 MMT of sunflower oil in MY2015, and produced just 0.43 MMT, incremental increases will cut no ice.
In FY2008, India’s imports of sunflower crude oil was 87,086.03 MT, which increased to 2,79,361.59 MT the following year. During the same period, India’s production started to fall drastically and to add to that Customs duty was as high as 65%. Vimal Sharma, Senior Manager, Imports and Control, Liberty Oil Mills Ltd., says, “We started the sunflower crude oil import business in 1958. About a decade ago, the Customs duty was extremely high. If I remember correctly, it touched 65%. But because of constant shortfall in the domestic market, duty was brought down to zero percent. subsequently.” As on January 24, 2006, the Customs duty was 65%, which was brought down gradually to 50% and to 40% and then to 0% as on April 1, 2008. Importers did enjoy zero duty period for about 58 months, which finally ended on January 23, 2013. “The shortage is now wider, but the import duty is 12.5%, which I think is high – considering our imports volume. There is competition in the international market, so the price keeps on changing. It has a direct impact on our profit margin. However, the good thing is that, there is demand,” Sharma adds. Liberty Oil Mills Ltd. imports 120,000 MT of sunflower crude
oil annually.
“This is a round-the-year business, but like any other commodity, there is price fluctuation in the international market. Every year, we import around 100,000 MT of crude sunflower oil from Ukraine. So, if you look at how the duty structure has been changing in the last 10 years, you’ll realise the impact on us,” says K. T. V. Kannan, Managing Director, K.T.V. Health Food Private Limited. He further tells The Dollar Business that the business will continue as usual because of the growing market demand, but profit margins remain unpredictable. “Our total tax at the moment is about 17.8%, which includes Education Cess and 5% local VAT,” he adds.
But, why does India not import sunflower oil seeds and refined oil? “It really does not make sense to import these products because import duties on sunflower oil seeds and refined oil are as high as 30% and 20% respectively. People who are interested in trading in sunflower oil are doing so because duties are comparatively low,” answers Dr. B. V. Mehta, Executive Director, The Solvent Extractors' Association of India.
Packaged sunflower oil in an assembly line, ready to be shipped to distributors and retailers.
A low domestic production means exports have remained miniscule for sunflower oil and imports have grown manifold, though sources of our imports have changed over the years. According to the Ministry of Commerce, GoI, in FY2012, the imports of sunflower crude oil from Ukraine soared by 60.48%. Data also shows that in FY2014, imports from Argentina dropped by 87.23%. Sharma affirms, “We started with Argentina as our biggest sourcing destination. After a few years, importers flocked to Brazil. Importers switched because of the price difference. And, now, Ukraine is the obvious choice because it offers good prices and excellent quality. The distance is also shorter, which adds to our advantage.”
According to Sharma, easy availability of vessels from Ukraine also keeps the business flowing. “A vessel can carry around 60,000 MT. But since we don’t need that much of oil at one go, we book around 10,000 MT, and the rest belongs to other importers. Ukraine also offers better quality," says Sharma. However, Argentina still comes as a huge threat to the rest of the sunflower oil exporters.
“There is a noticeable price difference between Argentinian and Ukrainian sunflower oils because of the differences in quality. Crude sunflower oil from Argentina is cheaper because their oil is darker, which requires extra bleaching – the same is the case with crude from Europe. Whereas, crude from Ukraine is light in colour and there is no processing loss. So, they have an edge,” says a senior official from Athena Tradewinds.
However, of late, Argentina is coming back into the game. Indian importers are sourcing a sizable volume of crude sunflower oil from Argentina because of price advantage. Importers say that Argentinian price is 5% lower than the Ukrainian price – and as such Argentina's share in India's imports is slowly going up, from 0.07% in CY2014 to 0.47% in CY2015. Saran, Partner, Greenish International, a company that imports sunflower oil says, “I did not do any business with Ukrainian exporters this year because their prices were too steep. In addition, the country abounds in fraudulent practises. So unless you’re an established importer, it isn’t easy to find someone genuine. This year, Argentina was a better source because their prices were lower and ease of business have increased. They are competing against Ukraine, so Indian importers have an advantage – one just has to play smart." Which means Indian importers might negotiate on quality, but definitely not on their profit margin!
A snapshot of an Ukrainian agricultural landscape with blossoming buckwheat and sunflower field.
Seconding Saran, Elya Kupets, Owner of Alfa-Eteks, a Ukraine based exporter of sunflower oil, says, “The competition is tough from Argentina. It’s because the price of crude sunflower oil depends on the price of oil seeds, and this year, the price of oil seeds is high. Price fluctuates once (sometimes twice) a week. We enjoy doing business with Indian traders, but it’s hard to find regular customers. There are many buyers, but they buy in small quantities, and perhaps, it may be the price that’s stopping them from going in for bulk purchases.” However, Olga Danyuk of Ukrainian Agribusiness Club (UCAB) believes Russia or Argentina won't impact Ukraine's sunflower oil export business. "The share of Ukraine, Russia and Argentina on the global sunflower oil market is 56%, 21% and 6% respectively. Lower prices in Russia and Argentina cannot have significant impact on Ukrainian market prices because of their low share of market. The price difference in these countries may be due by differences in quality and transportation costs. The price for sunflower oil in Ukraine depends on global market of vegetable oils and can decrease by downhill trends on palm oil and soybean oil," Danyuk explains.
According to a report released by the US Department of Agriculture (USDA), Ukraine’s production of sunflower oil for MY2017 has reached 5.54 MMT, which is close to 33% of the global production – its production in MY2016 reached 4.7 MMT. So, what does the tough global competition between Ukraine, Argentina and Russia indicate (of course, couple with India’s low production and increasing domestic consumption)?
It only points in one direction – importers of crude sunflower oil will continue to reap sunny gains for a long long time. Though margins will keep on fluctuating because of the seasonality of the product, the future definitely looks promising for importers of crude sunflower oil. All they need is little policy interference and high volume play!
Svitlana Synkovska
MARKETING DIRECTOR.
APK-INFORM MEDIA GROUP
TDB: What is your outlook for the industry? Will prices keep going down?
Svitlana Synkovska (SS): At the moment, sunflower oil industry is one of the most important and influential segment of the Ukrainian agribusiness sector. The country's current crushing capacity is way bigger than its current production and exports of the product. International players like Bunge and Cargill are actively involved in the business, and there are also many small and medium domestic players, including Kernel.
It is very hard to predict the market, but, at the moment, the price is going downward. According to our research, for November-December, while FOB (free on board) price will be around $760-770 per MT, bidding price will be around $745-750 per MT. And for January-March, while FOB will be around $760 per MT, bidding price will be around $740-750 per MT.
TDB: How satisfied are you with the logistics and infrastructure in Ukraine?
SS: The logistics and infrastructure are simply perfect at the moment, which is ideal for exports. Most of the plants are concentrated in the central and southern parts, regions where sunflower is grown, and, of course, in the vicinity of seaports. Currently, we have 12 major modern seaport terminals, the big ones being RISOIL, EVERI, DW. OLIR and UPSS, with total capacities of 1 MMT per year or more. Also, the overall Ukrainian crushing and veg-oils industry attracted significant foreign investments.
TDB: Harvest was exceptionally good this year. Do you think there will be enough demand for the product?
SS: It has been a very good harvest year for us. The total production is around 13 MMT, against 11.1 MMT last year. This year, we can produce up to 5.5 MMT of sunflower crude oil, which means the export potential for FY2017 is around 5 MMT. Good harvest does press on the prices, but we expect good demand from our main buyers India, China and Egypt. When the price goes down, demand increases. And since traders like high volumes, we will be fine!
TDB: How often does the sunflower crude oil price changes in Ukraine and what triggers the change?
SS: Ukraine has an open market for sunflower oil. Fluctuation of price depends upon numerous domestic and global factors, but the quality of seeds, which vary depending upon the weather, is the main factor that decides the oil price. Other than that, demand pattern of our main buyers, the market situation of other oil products, legislation, etc. determine the market price of sunflower oil.
TDB: Indian importers prefer smaller shipments rather than bulk imports. What is the logic?
SS: Because price plays a major role in the trade, imports pattern differs from commodity to commodity. In case of sunflower crude oil, the price keeps on changing frequently, which discourages the traders from placing a bulk order. Thus, Indian importers prefer small vessels than the large ones.
TDB: Recently, some Indian importers sourced from Argentina as the prices there were low. How severe was the impact on Ukrainian exporters?
SS: Let’s keep in mind that Argentinian oil quality is inferior. Argentina had a huge impact on the global sunflower oil price and with the drop in their price, international price dropped, which was a huge challenge for us. And I will tell you that Ukrainian exporters had to sell their products at a much lower price, compromising on their margin.
On the other hand, in MY2016, EU became our biggest buyer by outranking India – European countries purchased 1.23 MMT, while India bought 1.19 MMT. And in the current market year, EU’s purchase from Ukraine is increasing. As of today, imports volume from EU has doubled – 343.2 MT against 151 MT last year the same period. So overall, the trade remains balanced.
TDB: How do you find doing business with Indian importers?
SS: Well, we are not directly involved in trading, but are an agribusiness consulting company. However, three years ago, I was a speaker on GlobOil India conference and it was a great experience. We have several clients from India – subscribers of our market reports and participants for the conferences that we organise. India is a huge and important market with dynamic developments and big potential. Especially as far as Ukraine is concerned, India is immensely important for our sunflower crude trade. In the coming year, we plan to organise big international conference on sunflower oil trade in India.
Andrey Shevchuk
DIRECTOR – PROCUREMENT,
SUNGRANT PLUS SE, UKRAINE
TDB: How often does the price of crude sunflower oil fluctuate?
Andrey Shevchuk (AS): The price of sunflower crude oil changes roughly 3-4 times in a trading year (TY; September to July). Harvest begins in late August until November, and naturally, the price comes down. But because of high demand, price goes up in October and November, which again drops in December and January because it is holiday season and of course results in good sales. So, May, June, July, October and November are the months when the price can really get high.
TDB: Why does price drop in February and March?
AS: Well, this is the time when farmers need money for their farm. They will sell the oil seeds from their stock, which has a direct impact on sunflower crude oil price. But within a few weeks, as the stock empties, the price of the commodity will shoot up and will gradually come down by the end of June – as the demand for sunflower oil in the international market diminishes.
TDB: Does India's import pattern of sunflower oil impacts your price?
AS: Yes, it does. India being a major buyer, a decrease or increase in demand plays a crucial role in price movement. Also, I would say that the price of soya bean seeds in USA, Brazil and Argentina has a huge impact on sunflower oil price as it's a supplementary product. And since India is one of the largest importers of soya bean too, it has direct impact on sunflower oil price in Ukraine.
TDB: Sunflower production has gone up this year in Ukraine, now representing 56% of the world’s total production. What will be the impact on exports?
AS: As compared to TY2015, production has increased by 20% in TY2016 and exports have registered a new record, which was only expected. But it must be remembered that production of sunflower and soya beans in Europe have increased by 9.5% and 5.7% respectively. In addition, it is anticipated that soya production will increase in US and around the world, and this can be a serious threat for sunflower crude oil exporters.
TDB: Do you think we will see a price drop because of increased production?
AS: In the second week of October, the price of sunflower seeds fell by $12 (or 2%) per metric tonne (MT) and the price for sunflower crude oil fell $20 per MT. The crude oil price may go down further this year due to good harvest. Having said that, despite the increase in harvest, there is a constant shortage of raw materials because Ukraine processes roughly 20 million MT, which is much lower than our production capacity.
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