FMCG companies may let go of discounts as palm oil rally makes ground slippery

Packaged consumer goods companies selling processed foods, soaps and cosmetics said they may pull back discounts on large packs after the festive season, if the palm oil price that shot up 22% in India in the last one week doesn't come down.

The price of palm oil, which had come down by more than 50% from their peak earlier this year, has surged again, with Russia threatening to pull out of an agreement on Black Sea grain exports - palm oil also comes under the category - and heavy rains in Malaysia raising concerns over palm oil supplies.

"We are holding on to current prices till Diwali, but will take a call on pulling back the discounts on big packs if the palm oil prices remain at current levels," said Mayank Shah, senior category head at biscuits maker Parle Products. "Prices of wheat and sugar which remain at elevated levels are anyway continuing to impact our margins," Shah said.

Hindustan Unilever, Wipro Consumer Care, Marico, Godrej Consumer and Britannia are among the FMCG companies heavily impacted by palm oil prices.

But Neeraj Khatri, chief executive at Wipro Consumer Care, India and the Saarc region, said the maker of the Santoor soap and Yardley deos wasn't planning to increase the prices currently, despite the higher cost of palm oil.

Companies said palm oil prices may even go up 20% internationally if Russia stops grain exports through the Black Sea.

Apart from domestic consumption, palm oil is majorly used by the hotel, restaurants and cafe segment in India.

Pradeep Chowdhry, managing director of Gemini Edibles & Fats, said palm oil prices may surge by 20% if Russia stops grain exports through the Black Sea. "The dollar getting stronger against the rupee is another issue which is impacting imported edible oil prices," he said.

India imports 14.5 million tonnes of edible oils annually, of which palm oil constitutes 8-9 million tonnes. The country buys palm oil from Indonesia and Malaysia.

"The imported price of palm oil, which was $800 per tonne a week ago, has gone up to $980 per tonne after the Russian threat," said Sandeep Bajoria, chief executive of oil broking firm Sunvin Group. But they are still much lower than the peak of $2,100 a tonne a few months back. "The demand for palm oil is very strong across the globe and the pipeline in many countries including India has dried up," Bajoria added.

Even though raw material prices have softened over recent months, companies have not reduced prices stating that the reduction in prices was not enough to offset the profit impact, and instead had been offering discounts on large packs, especially during the festive season.

Sudhakar Desai, CEO of Emami Agrotech, said domestic demand remained good and would continue to be so after Diwali due to the marriage season. He added: "If the Ukraine crisis continues and if the global crude oil prices stay stable, we can expect current vegetable oil prices to be stable."

Earlier this year, the government had abolished the basic import tax on crude palm oil to keep a lid on local prices. But New Delhi continues with a 5% agriculture infrastructure and development cess on imports.