Ensuring competition in cooking oil, ghee industry
07 January, 2011
ISLAMABAD: A competition assessment study on cooking oil and ghee sector in Pakistan has proposed five measures to the Competition Commission of Pakistan (CCP) for ensuring competition in the $4.5 billion industry.
The study observes that in a competitive market, firms routinely refer to prices in their advertisements. This is normally not practiced in the advertisement issued by the firms in the cooking oil and ghee sector. This also indicates a lack of competitive pressure on the firms.
According to the executive summary of the study, it has been recommended to the CCP to monitor and examine the stock positions of palm oil in the country especially of those firms that are direct importers, which is mostly the case. Analyse customs duty on the palm oil and its likely substitutes and accordingly recommend the government to levy uniform duties. Analyse production schedule and possibilities of import substitution through growing alternative raw materials, including palm oil, within Pakistan. Analyse the role and share of unregistered suppliers from both quality and competition perspectives.
Encourage efficiency in specific firms by pointing out comparative performance benchmarks such as capacity utilisation and diversification of input sourcing.
This study is a competition assessment of cooking oil and ghee sector in Pakistan focusing on possible abuse of dominance by large players, entry barriers, and regulatory issues. It looks into the value chain and business model of the industry to analyse possible impediments to competition. It explores the role of the government in the industry by regulatory and market based operations. Commissioned by the CCP, the study makes policy recommendations to CCP to improve market competition, efficiency scale and take appropriate actions.
One of the obvious questions is that why the manufacturers did not pass on full benefits of lowering prices of palm oil in their purchases during 2008 to the consumers of ghee and cooking oil in Pakistan. Had they stopped their purchases during rise in international market?
Did the country face any shortage of ghee and oil during the same period? Were there any chances of close coordination among some influential and large manufacturers to create the price hike situation in the market to get maximum benefits by controlling their means of production? This study explores the answers of these questions along with overall sectoral analysis of this important industry, which is paying over Rs 40 billion to the government exchequer in shape of different taxes.
The study is based on “Competition Assessment Framework” (CAF) developed as an operational guide for identifying barriers to competition in developing countries by the Department for International Development, United Kingdom. This framework is a generic tool to assess the degree of competition in a sector and therefore may not be used in all circumstances with consistency of results. However, it does offer useful sets of indicators to gauge the degree of competition. The analytical framework is structured on identification of relevant market, market structure, barriers to entry, role of government policies or institutions, consideration of vested interests, and signs of anti-competitive behaviour by firms.
The cooking oil and vegetable ghee industry is a large manufacturing sector in Pakistan. Around 115 units are producing vegetable ghee/cooking oil with an installed capacity of around 2.8 million tonnes. Actual production against this capacity is around 1.5-1.8 million tonnes of vegetable ghee/cooking oil. This makes it a Rs 384 billion ($ 4.5 billion) industry. Annual increase in edible oil consumption is about 7.7 percent due to population growth and increase in per capita income.
Over the last two decades, import of cooking oil has registered an average annual growth rate of around 15 percent. Share of the import has increased from 3 percent in 2000-01 to about 5 percent in 2007-08. Lately, total demand for edible oil was about three million tonnes and out of this less than one million tonne was indigenous production while the remaining quantity had to be imported. In 2009-10, Pakistan imported palm oil worth Rs 106 billion.
Main findings of the research are as follows. The study finds that over 2007-08, the international prices of palm oil dropped significantly, by almost around 35 percent. In exactly the same period, the dollar, which had remained stable around Rs 60 for a number of years, jumped by 28 percent and the price of vegetable ghee rose by 72 percent. The aggregate effect on the price of vegetable ghee should have been none or little, but it was increased by 72 percent. Study demonstrates that the manufacturers did not fully synchronise their prices with the changes in the input prices. In 2006-07, a 90 percent increase in the price of palm oil was not fully passed on to the consumer as the output price rose by 40 percent. However, in 2007-08, a reduction in the price of imported palm oil resulted into an increase of the output prices.
The study argues that among all edible oil and fats, palm oil and soya bean are major import products in Pakistan. Soya bean is considered to be an alternative of palm oil but is imported in much less quantity than palm oil because of its high structured import price. This creates a protection for palm oil dependent firms and asymmetry that speaks of absence of a level-playing field. The survey figures for 2009 suggest that the aggregate production levels achieved by Dalda, United (Kashmir), Hamza (Sufi) and Habib, the leading four firms is almost 10 percent of the total market, significantly below the international benchmark of 40 percent, which is considered as an indicator of oligopolistic conduct. It suggests that the likelihood of oligopolistic behaviour in the cooking oil and ghee industry is very low.
The study finds that market position of these four leading firms has been dynamic over the past five years. Our data suggests that in 2005, Dalda was in the lowest position, and United (Kashmir) was leading the market. Since 2007, Dalda has established its leadership position, while Habib has experienced consistent decline. Over these years, Hamza (Sufi) and United (Kashmir) have remained stable in their production levels, both remaining around 70,000 metric tonnes and 40,000 metric tonnes, respectively. The gain of Dalda has been made at the cost of Habib, but a reasonable gain of Dalda is exogenous, which means it has created a new market.
The study also argues that excess capacity provides leverage to firms to control production levels. This seems quite true in the case of cooking oil and ghee industry in Pakistan in which the average capacity utilisation is 44 percent. The presence of countless unregistered suppliers of vegetable ghee should have created pressure on the registered firms to be more efficient and price sensitive but this has not happened, which is intriguing. As a matter of fact, inefficiency losses should have resulted in closure of a few units, which also did not take place. Instead, the market absorbed new players in 2005-06.