How Adani got RICH after Palm Oil crisis ? : Edible Oil crisis Case study

Hi, everybody. On 20 April 2022, Indonesia, which is the world’s largest consumer-producer and exporter of palm oil, banned the export of palm oil and its raw materials. And as soon as this news came out, it had a drastic impact on the FMCG stocks of India. In fact, even frontline stocks like Hindustan, Unilever, Britannia Industries, Goze consumer products and Mariko, all of them were down between 4% to 6%. But you know what? During the exact same time, it so happened that Adani Wilma’s stock shot up by 5% to hit an all-time high of 802 Rs8 and Ruchi soya zoomed by 8%. And this fluctuation in the stock market has a very deep-rooted story that very few people understand. And more importantly, it’s got a very important lesson in business, geopolitics and stock market that very few retail investors actually study. So if you want to be a wise investor, let’s try to understand what was the deal with the global oil industry? How does geopolitics directly affect these stocks in India? And most importantly, as investors, what are the study materials to help you understand these critical business insights that can make you a smarter investor?

Global production in 2020 alone is over 73 million tons.

Let’s start from the basics and try to understand how does the global oil market function? To put that straight, there are four important types of oil that are widely used across the world. Palm oil, soybean oil, canola oil and sunflower oil. Out of all of them, palm oil makes up 40% of the global supply. In fact, palm oil is the world’s most widely used vegetable oil, with its global production in 2020 alone being over 73 million tons. But if you look at the suppliers of palm oil, you will see that there are only two edible oil Giants, Indonesia and Malaysia. Indonesia is the largest exporter of palm oil with 60% market share, and Malaysia is responsible for 30% of the global supply. Together, just two of these countries account for 90% of the entire world’s palm oil supply. And guess what? India is the biggest importer of palm oil, with palm oil alone being 60% of our entire vegetable oil imports. Now, the question we hear is where is all this palm oil being used? Because as far as we know, it’s just used in the kitchens and that’s very rarely, right? Well, not really.

As it turns out, more than 50% of the products in an average Indian house contains palm oil products. And this includes cosmetics, processed foods, cakes, chocolates, soaps, shampoos, cleaning products, and even biofuel. And subsequently, the companies that need palm oil are none other than your Colgate Oreo, Maggie KitKat and doubt. So palm oil is extremely important for the FMCG sector of India.

There is no conflict or crisis going on in Indonesia.

So now the question over here is whether there is a crisis in Pakistan, Sri Lanka, and Ukraine tickets. But what about Indonesia? There is no conflict or crisis going on in Indonesia. Right. So why have they banned their palm oil export? Well, here’s why you need to understand the ripple effect caused in the global economy. Because of one major event military operation is now underway in Eastern Ukraine. Ukraine has declared a state of emergency. The full-scale invasion that intelligence officials had been warning about for weeks is now underway. And there are reports of explosions and attacks at several major Ukrainian cities. So the question is, how is this Russian invasion of Ukraine actually affecting the oil industry of the world? Well, let’s have a look at each one of these oils properly and you’ll clearly understand what exactly is happening.

The major producer of soybean is none other than Argentina.

Let’s start with the first type of oil, which is sunflower. As it turns out, Ukraine is the largest exporter of sunflower oil in the world with 46% of the global sunflower seed and Sapphire oil production. And the second largest producer is none other than Russia, which exports 23% of the world’s supply. Together, Russia and Ukraine export 100 lakh tons of crude sunflower oil, which is close to 70% of the entire world supply. But as soon as Russia’s invasion of Ukraine happens, the Ukraine exports have been tended. And because of all the sanctions and holders imposed by the west on Russia, even the Russian sunflower oil exports also got delayed. So sunflower oil, which is the second most used oil in the world and one of the closest replacements of palm, was no longer available in enough quantities. Then we move on to soybean oil. The major producer of soybean is none other than Argentina. And even there, because of bad weather, the crops were affected and they had a poor harvesting season. Similarly, the production of Canada oil was hit in Canada last year due to drought. So practically three out of the four most used edible oils in the world have supply shortages.

Their homeland in India, Bangladesh, and Pakistan.

So even the question of replacing one with the other was out of the window, which means what? The only oil the industries all around the world were banking on was palm oil. And as we saw before, only two nations account for 90% of the entire world’s palm oil supply. And here’s where things got worse. Malaysia, which is the second-largest producer of palm oil, was facing a COVID-induced labor shortage. And labor in case of the palm oil industry is extremely important because palm oil harvesting is largely a manual process because the palm trees are extremely tall. So these workers have to either climb the tree or they have to carry long poles with sickles to harvest palms. But as soon as Kuwait happen, these neighbors went back to their homeland in India, Bangladesh, and Pakistan. As a result, even Indonesia’s market could not cater to this demand, which means the entire global demand fell upon the shoulders of just one country, which was Indonesia. Now, the question we hear is this is such an amazing opportunity for Indonesia, right? The global demand is at its peak. The alternative oils are not available in enough quantities and Indonesia practically is a monopoly.

Many palm oil plants are grown in this region called the Java and Kali Mantan.

Now, why did they suddenly ban their own exports? Well, long story short, Indonesia used a large amount of its palm oil into producing something called biodiesel, which is nothing but another type of biofuel. In 2020, Reuters reported that it used over 7 million tons of palm oil out of its total national output of 41. 4 million tons. Secondly, the distribution line of this industry is completely unorganized, which further led to a lot of chaos. Now, I don’t know how many of you know the geography of Indonesia, but then Indonesia looks something like this. It’s a cluster of 170 scattered Islands and 60 of them are inhabited. Many palm oil plants are grown in this region called the Java and Kali Mantan. And both these Islands lack distribution links to the domestic market. While the local market is scattered over Java and Sumatra, 50% of the country’s consumption is in Java and another island called Bali. And lastly, because the export prices started rising, people stopped supplying to domestic vendors and started exporting all the palm oil that they had. As a result, the price of palm oil in the domestic market of Indonesia shot up and this price became so high that it went from Rs14,000 to 25 Rs0 per liter.

The remaining comes from Malaysia

And because of this, the domestic industries in Indonesia started facing trouble. It’s like Dubai’s, petrol prices are increasing because they’re exporting so much oil that they themselves are falling short of petrol. So finally, the Indonesian government imposed a ban on the export of palm oil. This is how in spite of having the golden opportunity to dominate the world trade, Indonesia had to pass on this opportunity and impose a ban. And this brings me to the next question, and that is, how does this ban affect the Indian industries and Indian stocks? Well, like I said before, India is the largest importer of palm oil in the world, out of which 45% of it comes from Indonesia and the remaining comes from Malaysia. And because both these regions could not cater to the extreme demand of palm oil, it had a drastic impact on the Indian industries. And it’s not just palm oil, but even the price of soybean rose by 29%. And sunflower oil, which was supposed to come from Russia and Ukraine, spiked by 90%. And like we discussed before, palm oil is an integral part of the FMCG sector for everything from soaps to shampoos to biscuits to even to peace.

And you know what? Palm oil and its derivatives nearly account for more than 20% of the input cost of these consumer products. So if your soap costs Rs10 to make palm oil alone cost Rs2. So any price fluctuation in palm oil will directly squeeze the margins of the companies, eventually leading to price hikes. This is the reason why if you saw the news, the prices of soaps increased by nearly 26%, while Shampoos and paradise increased by 8% to 9%. So if you see it was directly affecting the balance sheet of companies like Hol, Nestle and Mariko and right enough, we saw a steep drop in the stock price between 4% to 6% each. But now the question over here is when these stocks were falling, what could be the reason for Adani Wilma’s stock rise? Well, if you read the news closely, you will see that there are four subtypes of palm oil, refined Bleached deodorized and crude palm oil. And the catch of the matter we hear is that Indonesia banned all three types of palm oil exports except crude palm oil, which means instead of refined palm oil, we will get only crude palm oil which then has to be refined in India.

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