New Delhi:Soap makers have some thing to cheer. Prices of palm oil, a key ingredient used to make soaps, have fallen by around 15% from February this year. Increasing stockpiles in Malaysia and favorable weather are driving the prices of palm futures downwards.
According to Bloomberg, palm oil stockpiles in Malaysia climbed to the highest level in six months in April on increased production. The higher output comes after two consecutive years of production declines. According to Elara Capital, palm oil output in Malaysia is estimated to register a growth of around 4% this year to 17.6 million tones. Bloomberg, on the other hand, estimates global palm oil output to rise 6.6% to 48.6 million tons this year on favorable weather conditions.
Falling palm oil prices will be good news for companies like Hindustan Unilever and Godrej Consumer Products. Apart from soaps, palm oil is also used in cooking oil, lipsticks and several cosmetic products. According to analysts at Elara Capital, every percentage point drop in palm oil prices is estimated to improve Hindustan Unilever’s margins by around 4 basis points. For Godrej Consumer Products (excluding Godrej Household Products), the benefit is pegged at around 20 basis points.
Himani Singh and Sumant Kumar of Elara Capital note:
All things remaining constant, our sensitivity analysis shows that an average 7% drop in prices for the year has the potential to push Hindustan Unilever’s margin upwards of 15%, which would close to its 7-year high.
The low palm oil prices, if sustained for long time, will bring in much required relief of consumer goods producers, especially at a time when their margins are being pinched by higher raw material costs.