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Which FMCG Companies to Stay Away from as Indonesia Bans Palm Oil Exports 🌴

During the week, Indonesia banned the export of palm oil. Indonesia is the world’s largest edible oil supplier, and accounts for a third of the world’s supply. Why is this important?


Palm oil is the most widely used cooking oil in the world. It has both edible and non-edible applications. On the former it is used in almost everything from instant noodles to ice creams, and on the latter from soaps to biodiesel.


For many consumer companies like Godrej, Hindustan Unilever, Marico and Nestle, palm oil is one of the key products used. With inflation already high on other input costs (crude, packaging material, wheat and transportation), edible oil prices going higher signify one more hard blow.


Why did Indonesia ban palm oil exports?

  1. Agricultural output prices have risen globally post the Russia-Ukraine conflict. The sharp increase in prices has fuelled inflation across the globe.

  2. Ukraine is the largest exporter of sunflower oil in the world, accounting for nearly half of the trade.

  3. Russia is the second largest producer of sunflower oil, and exports about a quarter of the world’s supply.

  4. The supply crunch caused by the Russia-Ukraine conflict resulted in prices soaring, and demand for other substitute edible oils increasing. In the process, palm oil prices shot up and supply was short.

  5. Local shortages of palm oil in Indonesia led to street protests and became a key political issue.

  6. Governments are the most sensitive to food inflation, since that affects populations the most, and is the single largest contributor to overall inflation. Multiple countries have turned inwards and policies are being designed to protect national food security amid rising prices.

Who gets affected by the ban?

Palm oil has a very wide variety of applications. India is not so dependent on it for household cooking. Sunflower oil accounts for most of that. The majority of palm oil in India is used up by packaged food manufacturers. And India relies on Indonesian palm oil for nearly half its needs.

  1. Take Hindustan Unilever for instance, palm oil prices are up 1.6x as of March 31, 2022, compared to last year. Palm oil is amongst the 3 key raw materials for HUL, along with crude oil and polyethylene.Between January and March 2022, HUL increased prices of soaps, shampoos and detergents by 3-20%. Soon after that, it also increased prices across its food portfolio.

  2. In the past 6 months, Godrej Consumer Products increased prices by 10-11% across its personal wash portfolio.

But it’s not only palm oil. Palm prices increasing has only exacerbated the situation. Consumer companies are already grappling with an increase in prices of crude oil (required for transportation), packaging material (directly linked to crude prices) and other cooking oils.

  1. Nestle too raised prices. Maggi has seen a hike of 9-14%, and Nescafe prices are up 4%. This one has been more driven by increasing wheat prices,

  2. Amul increased prices by 3% as packaging, transportation and feed got more expensive.

Impact on consumers < impact on corporates

With inflation rising across the board, consumer companies have little ability to pas on entire costs to end users. End users are already battling other inflationary pressures in their lives, and if entire costs are passed on by companies, there is a risk of people buying lesser, which will ultimately hit companies.


Take the numbers we mentioned above as an example. Input prices are up 20-60% in the last year, prices to users are up 10%, and volume growth is flat to declining. This essentially implies lower margins for consumer companies.


Some of the pressures are eased by companies by leveraging factors like buying efficiencies (volume discounts, change in suppliers, location of suppliers, etc.), asset sweating, operating leverage, pricing actions (or volume reductions), and premiumisation.


But the net impact on companies is negative, and will continue being so in this context and scenario.


Consumer companies and Rupeeting

Most of the exposure that we have in consumer companies is through the Bread & Butter portfolio. However, only Hindustan Unilever is impacted by the palm oil export ban in Indonesia.

  1. Asian Paints

  2. Hindustan Unilever

  3. Jubilant FoodWorks

  4. Pidilite Industries

We are comfortable with names like Asian Paints and Pidilite Industries given the linkage to housing, and strong demand in that industry. Jubilant FoodWorks, unlike packaged food companies is relatively inelastic because of its more affluent exposure.

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