Business News/ Companies / News/  Olive oil set to get more expensive as global prices spike

New Delhi: Indian oil importers are expecting a rough ride in 2015 after being hit by a steep increase in the international price of olive oil and a rise in duty on all refined edible oils.

Importers are now contemplating whether to pass on the hike to consumers and see sales suffer or keep prices stable and cut down on expenses by increasing efficiencies in the value chain.

The price of olive oil raced to a six-year high of $4,480 per tonne at the end of December, according to data from Bloomberg, after a severe drought in Spain and Italy, which account for almost 90% of the global olive oil production. The olive oil price in the international market increased by almost 24% between January and December 2014.

On the other hand, prices of all other edible oils such as sunflower and soyabean oil plummeted in 2014, which forced the government to hike import duty on refined edible oils to 15% from 10%.

Helped by stable prices, low import duties and high investment in advertisement and promotion in the last few years, the industry saw almost 30% year-on-year growth, expanding from 2,680.4 tonnes of imports in 2008-09 to 9,441.31 tonnes in 2013-14, according to data from the department of commerce.

In 2014, the industry imported almost 11,000 tonnes of oil, according to Rajneesh Bhasin, managing director, Borges India Pvt. Ltd, and president of the Indian Olive Oil Association.

Faced with the steep rise in price of imported oil and the duty hike, the industry expects the market to be flat this calendar year.

“Olive oil as a category should see flat growth; at best we should be able to do 10,500 to 11,000 tonnes this year," said Bhasin.

While some companies have started to increase their prices, the extent of the increase in international prices has meant that consumer prices will have to be increased in gradual steps.

“We have increased our prices, but we can’t increase at one go. If we have to increase by prices by over 20%, then we will do it gradually, 5% or so at a time," said Akshay Modi, executive director, Modi Naturals Ltd, which sells olive oil under the brand Oleev.

Others in the industry, however, doubt if the entire price increase can be passed on to the consumers.

“Ability of the industry to pass on the prices is a question mark, because if the entire price increase has to be passed on, then it would result in a significant increase in price for the consumer, which they might not be willing to pay," said Yogesh Bellani, chief executive at FieldFresh Foods Pvt. Ltd, which sells Del Monte brand olive oil, adding that the adoption of olive oil will be impacted if customers do not see the value in it, a scenario which the nascent industry would like to avoid.

Although a price increase is unavoidable, the company will be trying to absorb as much of the cost as possible, according to Aseem Soni, director of the consumer packs segment at Cargill India Pvt. Ltd, which sells the Leonardo brand of olive oil.

“Significant price hike can result in de-growth of the category, which would mean that we would lose at least two years in returning to the market size seen last year," Soni said.

Most companies have been able to avoid price hikes so far as they had been sitting on stocks imported at lower prices earlier in 2014. However, Soni expects that the significantly higher priced new crop product (October-January crop) should hit market shelves by the middle of February and that is when one would start seeing price hikes.

Some companies are looking at cutting down on advertising and promotions to keep costs in check.

“We are urging members not to increase price but to reduce promotions to give the consumers a stable price. I don’t think doing BOGO (buy one, get one) all year round is a good way to build a brand. This is the best time to wean out such promotional activities," said Bhasin of Borges.

There might be some respite for the branded edible oils in the form of consolidation in the industry and a weak euro.

In the period from 1 January 2014 to 29 January, the euro has fallen by 21.74% against the Indian rupee.

The industry also expects some consolidation as higher prices are expected to force smaller importers out of the market. “When the industry was growing rapidly many people jumped onto the bandwagon. But with the high prices now, they will be sceptical of entering the market," said Modi of Modi Naturals.

A slowdown in the olive oil industry might be good news for the rice bran oil industry, which is also pitched as a healthy oil by producers and sells at almost one-fifth the cost.

“Olive oil forms a very small part of the 180 lakh tonne edible oil market in the country and it is at best suitable for purposes such as dressing, but not for cooking and frying Indian food," said B.V. Mehta, executive director of Solvent Extractors Association of India.

India’s rice bran oil market has the potential to expand to 1.6 million tonnes a year from the current 900,000 tonnes market size, he said.

Swaraj Singh Dhanjal
" Based in Mumbai, Swaraj Singh Dhanjal is responsible for Mint’s corporate news coverage. For the past eight years he has been writing on the biggest deals in private equity, venture capital, IPO market and corporate mergers and acquisitions. An engineer and an MBA, he started his journalism career in 2014 with Mint. "
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Updated: 03 Feb 2015, 04:22 PM IST
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