ISLAMABAD: A study conducted by the Competition Commission of Pakistan (CCP) on ghee/cooking oil sector apprehended that the big manufacturing units might abuse their dominance like entry barriers, and over-riding of regulatory framework within the sector.The study has pointed out that the manufacturers did not pass on full benefits of prices decline to the consumers. A competition assessment study of the CCP on the cooking oil and ghee sector in Pakistan issued on Thursday exposed various anti-competitive trends and suggested measures to improve the regulatory situation in the sector. This unique study covered wide range of issues in cooking oil/ghee sector including taxation, exports and competition.The study has found that the ghee and cooking oil manufacturing firms acted independently without market pressure and influenced market prices, reflecting lack of competitive behaviour in the market. While exploring role of government in regulatory and market based operations, the study makes policy recommendations to improve market competition and efficiency taking appropriate actions.
According to the study, around 115 units are producing vegetable ghee and cooking oil with a cumulative installed capacity of around 2.8 million tones. Actual production against the capacity is around 1.5-1.8 million tones. This makes it a 384 billion rupees (US $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.It remains astonishing that despite huge price fluctuations, not a single registered firm has gone out of business. This suggests that competition is not effective enough to force firms to exit from a business or maybe there are exit barriers. Seen in this way, creation of huge production capacity, without a cognisance of demand, may have become an exit barrier.The study specified that the firms may create a hurdle for new firms by creating and maintaining excess capacity. Thus whenever a new firm wishes to enter, the existing firm can increase the production levels. Excess capacity also provides leverage to firms to control production levels. This seems quite true in the case of Cooking Oil and Ghee (COG) 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, losses should have resulted in the closure of a few units, which also did not take place. Instead, the market has absorbed new players in 2005-06. 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 COG sector. This also indicates a lack of competitive pressure on the firms.
An important query is the unexplained rise in the prices of vegetable ghee in Pakistan despite a steep decline in the price of imported palm oil, particularly in the year 2007-08. Over 2007-08, the international prices of palm oil dropped significantly, by almost around 35 percent. In the same period, the dollar exchange rate which had remained stable around Rs60 for a number of years, jumped by 28 percent. Net effect of both these changes on the price of vegetable ghee should have been negligible but the price increased by 72 percent. At around that time, the manufacturers and importers had started accumulating palm oil stocks but they did not transfer the reduced prices to the end consumer. In 2008-09, the price of palm oil increased by 22 percent, dollar appreciated by another 6 percent, whereas the price of vegetable ghee dropped by 31 percent. This is likely due to a lag affect resulting from a possible accumulation of palm oil stock in the country on the account of previous decline in the prices. As a matter of fact, it confirms this hypothesis as it showed an increase in the quantity of palm oil by 28 percent. This possibly created a surplus in the stock of palm oil in the country bringing down the price.
The study further found 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. Finally in 2008-09, despite an increase in the prices of input, the price level of output came down. Probably, the overall price level, indicated by inflation rate, can also offer explanation. It seems that more than anything else, the manufacturers respond to the inflation rate. Thus an increasing price level of the vegetable ghee corresponds to an increasing inflation rate and vice versa is also true, the study said.It further disclosed that traders said that the branded ghee and cooking oil makers had not passed on the full benefit of falling palm oil rate from July to October 2008 to the consumers. The manufacturers, however, were of the view that they were in the wait and see period which market studies show that the prices of some regional and low sale brands are sometimes drastically low. Competitors try to fill this gap through different sales promotions to dealers and whole sellers. This price benefit generally does not pass on to the consumers. Consumers get the benefit of lower prices only when there is a noticeable reduction in the international price of palm oil and palm olien. It can also happen when sometimes government makes tax reduction in different tax slabs applicable to this industry.
Among all edible oil and fats, palm oil and soybean are major import products in Pakistan. Soybean which 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 level playing field. However, transportation costs also favour the trend to import palm oil over soybean oil.The study said that according to figures provided for the year 2009, the aggregate production levels achieved by the top four firms (Dalda, Kashmir, Sufi, Habib) is almost 10 percent of total market, significantly below the international benchmark of 40 percent that is considered as indicator of oligopolistic conduct. It suggests that the likelihood of oligopolistic behaviour in the cooking oil and ghee industry is very low. Market position with regards to production of the four leading firms has been dynamic over the past five years. The data suggest that in 2005, Dalda was in the lowest position, and United (Kashmir) was led the market. Since 2007, Dalda has established leadership, 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 MT and 40,000 respectively. The gain of Dalda has been made at the cost of Habib. In addition, a reasonable gain made by Dalda is exogenous; it has created a new market for its brand.
The study recommended the monitoring and examination of the stock positions of palm oil in the country especially by those firms who are direct importers, which is mostly the case.The study further recommended analysis of custom duty on the palm oil and its likely substitutes and accordingly recommended the government to levy uniform duties. There is also a need to analyse production schedule and possibilities of import substitution through growing alternative raw materials, including palm oil, within Pakistan. Further more, there is also need for analyse role and share of unregistered suppliers from both quality and competition perspectives. There is a need to encourage efficiency in specific firms by pointing out comparative performance benchmarks such as capacity utilisation and diversification of input sourcing.As an important component of its advocacy efforts, the CCP engages in research studies to assess competition dynamics in various sectors of the economy. In addition to creating public awareness about competition issues confronting the Pakistan economy, these studies also propose recommendations in order to enhance competition and efficiency in the respective sector. The ultimate aim remains to promote a competition oriented business culture in the country. The study on the Cooking Oil and Ghee industry in Pakistan is also part of the same efforts. The industry was selected on the basis of its affect on the average consumers. Expenditure on cooking oil and ghee comprises a significant proportion of an average household’s expenditure on food. The study highlights the value chain involved in the production and distribution of vegetable ghee and cooking oil – Brecorder
