Wednesday, July 13, 2011

Veg Oil Price Controls: Industry Shakeout?

In November 2010, the National Development and Reform Commission ordered the top four vegetable oil companies to freeze their prices as a temporary inflation control measure. According to the Economic Information news site, companies have been losing money and are quietly beginning to raise prices. The large companies claim they have no plan to raise prices, but small and medium prices are feeling the pressure from rising costs. Will the cash-rich large companies be able to wait out the price controls while small and medium companies on the fringe are forced out?

The NDRC's "price decree" only applied to the four largest companies--COFCO, Yihai Kerry, Sinotex and Jiusan--but they have a large share of the market. Small and medium companies reportedly did not dare raise prices since they would then face declining sales.

The price controls were initially set to continue through March and were then extended for another two months. There has been no announcement but people in the industry say that the order to keep prices stable has been extended to August 15. The chairman of corn oil producer Xiwang Food said his company has no plan to increase prices since the government is strictly controlling edible oil prices.

The big companies say they still have no plans to raise prices. COFCO claims that it has remained profitable by cutting costs and raising efficiency. No mention of whether their line of credit with state-run banks and government-sponsored overseas IPOs gives them the cash flow to sustain the losses for a while. I count 34 divisions and companies listed on COFCO's web site, including multiple real estate and property development companies. They can afford to take a loss for the team on vegetable oil...probably offset by building a couple of shopping malls somewhere.

Medium and smaller companies are losing money as costs rise and they don't have the same easy access to cash. International soybean prices are at a high level. Companies are relying on government auctions of low-price domestic soybeans to keep raw material prices down, but domestic soybean prices will probably surge later this year due to a large decline in Chinese soybean production anticipated this fall. One industry analyst estimates that companies lose 100 to 200 yuan on every metric ton of oilseeds they process. A company in Shandong claims to lose 400 to 500 yuan.

Over the last couple of months companies have been starting to quietly raise prices. Luhua peanut oil company has ventured forth with a price increase. Its products are relatively high in quality, so its customers may be more accepting of price increases than those of low-price brands made by COFCO and Yihai kerry.

Given their losses, small and medium companies are under great pressure to raise prices and waiting for someone like Luhua to break the ice on price increases. There is disagreement among industry people as to whether Luhua's price increase will be the first domino in a series of price increases. Industry people say that small and medium-size companies are facing the prospect of shutting down if they don't get relief from cost pressure.

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