The Hindu Business Line : Rise in palm oil prices to hit FMCG cos

Rising international palmoil prices are set to squeeze operating margins of soap and personal product manufacturing companies such as Hindustan Lever, Godrej Consumer Products, Nirma Ltd and P&G.

"In fact, HLL has increased soap prices by 6-7 per cent across the board and personal product prices by 3-4 per cent as palm oil-based products (soaps and personal products) form 51 per cent of the company's sales and 90 per cent of its operating EBIT profit. Godrej has hiked its product prices by 10-12 per cent and is planning another hike by March-end if palm oil prices continue to rise," said Mr Sumeet Budhiraja, research analyst, Edelweiss Securities. Other FMCG companies are likely to follow the trend.

During the September quarter (Q2), EBIT margin on personal products of HLL fell by 1.36 per cent, while that on soaps was down 0.76 per cent. Similarly, Godrej has taken a knock of 11-14 per cent in margin during the same quarter. "Overall, in soaps and detergents we have assumed an 80 basis points decline in margins in calendar year 2007," said Mr Budhiraja.

Prices of palm oil on the Malaysian Derivatives Exchange have risen by 31 per cent from 1,195 ringgits a tonne in October to 1,530. Mumbai c&f (carrying and forwarding) prices of crude palm oil is up 25 per cent.

Apart from soap and personal products, other sectors likely to be affected by the spike in prices are food, chemical, cosmetic and pharmaceutical industries. In food, palm oil is the choice medium for manufacturing solid fat products and in frying snack foods.

Palm oil prices are moving up on fresh demand to make palm-based bio diesel and expected lower production of soya and rapeseed in South American and European countries in 2007. Palm oil prices are likely to remain high for some time as Malaysia - one the world's leading suppliers of palm oil — may not be able to ramp up production in the next few years as palm already accounts for about 65 per cent of cultivated land.

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