Arising trend in palm oil prices is giving rise to concerns on the profit margins of soap makers. Palm oil derivatives are a key ingredient in soap making. In fiscal 2009, companies had hiked soap prices in line with rising input costs in the first half. But when they fell, not all the benefits were passed on to consumers. That cost Hindustan Unilever Ltd (HUL), the market leader with a 45% share, as consumers switched to cheaper products in the mass soap segment. The company has been trying hard to regain share and growth and relaunched all its products, correcting the price disparities in the mass segment.
Now, palm oil prices are trending up again. Malaysian crude palm oil monthly average prices were up by 45% in November from a year ago. The latest weekly average price is up by 6% from a month ago.
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Palm fatty oil distillate, a key ingredient that goes into soap-making, fell from a high of $730 (Rs34,237) a tonne in January 2008 to $302 a tonne in December 2008, after the global slump. It traded at about $525 a tonne in November 2009 and will be higher in December. In 2010, too, palm oil prices are expected to remain higher due to rising demand and expectations of a tight supply situation. Crude oil prices are expected to trend higher, which also influences palm oil prices.
Does this mean that soap makers will hike prices again, leading to renewed fears of downtrading? Soaps contributed to nearly two-thirds of stand-alone sales at Godrej Consumer Products Ltd (GCPL), while oils and fats contributed to nearly half of material costs in fiscal 2009. Thus, companies cannot ignore inflation in this key input. But large companies such as HUL and GCPL would have contracted their future requirements at lower rates. Therefore, the immediate impact on these companies will be negligible.
In fact, a rising cost scenario may even work to their advantage. In an inflationary scenario, the relatively smaller firms will be forced to hike prices to offset rising input costs. Larger firms can choose to hold on to prices and gain share or hike prices without losing share. That is just the kind of environment that HUL would want to operate in, as it strives to regain lost ground in the soaps market. Its focus is on volume growth and share gains and not as much on margin improvement. So, rising input costs may actually work to the benefit of the larger firms in the longer run.
Graphics by Sandeep Bhatnagar / Mint
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