Vanaspati manufacturers facing slippery times

Manufacturers of Vanaspati (hydrogenated vegetable oil) are facing heavy losses following the abolition of India’s import tariff on crude palm oil. The companies may even be compelled to close their businesses if drastic steps are not taken to help them out of their dilemma.

The local Vanaspati industry, set up under the Indo Sri Lanka Free Trade Agreement with a total investment of US$100 million, involves 22 companies, 14 of which are Board of Investment (BOI) approved firms. They are engaged in the production and export to India of Vanaspati ghee, bakery shortening and margarine. The companies directly employ close to 4,000 people.

A gradual reduction of the import tariff, from 45 per cent to 20 per cent, and finally the abolition of the tariff last week, has dramatically reduced production costs for Indian manufacturers. As a result, prices of Vanaspati products have fallen in India, and Sri Lanka-based Vanaspati manufacturers and exporters have lost their competitive edge over their market rivals in India.

The escalation of world market prices for crude palm oil and crude palm olein, both used in the production of Vanaspati ghee, bakery shortening and margarine, along with India’s reduction of the import duty on both raw materials, have made it difficult for Sri Lankan exporters to compete in the Indian market.

Total Vanaspati exports from Sri Lanka between April 1, 2007 and March 31, 2008 amounted to 160,000 metric tonnes, which fell considerably short of the available quota of 250,000 metric tonnes. The industry has been facing difficulties since 2006, when India issued a gazette that canalized exports through the National Agricultural Co-operative Marketing Federation of India Ltd.

After intensive negotiations, India agreed to an annual quota of 250,000 metric tonnes of Vanaspati. However, the local industry was further hit by the introduction of a 4 per cent additional duty on imports of Vanaspati, bakery shortening and margarine from Sri Lanka. The additional costs came to US$60 per metric tonne.

This, along with the reduction of tariff duties on crude palm oil, has made exports of Vanaspati products to India non viable, investors say.“Our factories are facing a huge crisis,” said Sajad Mawzoon, president of the Vanaspati Manufacturers Association of Sri Lanka. “We will incur heavy losses if we continue to export to India.

“With the reduction of import taxes for crude palm oil, production costs have come down dramatically for Indian exporters, whereas our costs remain the same. We have lost the competitive edge we had over Indian producers. They can now supply the market with goods at a lower price than Sri Lankan exporters can,” Mr Mawzoon said.

According to Sena Suriyapperuma, director and general manager of Pyramid Lanka (Pvt) Limited, which exports Vanaspati, investors now have two options: they can either export refined palm oil to the Indian market or supply refined palm oil, bakery shortening or industry margarine to the local market.

Mr Mawzoon of the Vanaspati Manufacturers Association of Sri Lanka said investors were hoping they could work with the government to find a solution.“We could meet the local demand for 30,000 metric tonnes of industry margarine or 250,000 metric tonnes of bakery shortening and margarine. We hope we will be able to obtain a licence for this. If that fails, we will have to look into the possibility of negotiating with the Indian government to export a different product.”

Only four of the companies are equipped to manufacture bakery shortening and margarine. The remaining plants would have to invest in additional manufacturing equipment if this option were to be adopted. However, under agreements signed with the BOI, the companies may supply only 20 per cent of their output to the local market. According to a BOI official, allowing the companies to supply 100 per cent of their output to the local market would require some drastic decision-making.

Such decisions, the officials said, could result in protests from coconut millers who might see palm oil as a threat to their corner of the market, and pressure on the BOIC from other investors demanding concessions similar to those given to the Vanaspati industry.