Ukraine-Russia conflict: Indian, Chinese food firms should seek alternative veg oil supplies – Analyst
The spike could impact manufacturers and companies that produce vegetable oil for consumers and those that use it as a major ingredient in the production process.
Speaking to FoodNavigator-Asia, Senior Analyst of Consumer Research at Fitch Solutions Brice Dunlop said: “We’re going to see a drop in Ukrainian supply. Therefore, there are three methods to overcome the price hikes: first, find alternative sources of oil immediately like ghee or palm oil; second, re-formulate products (depending on the usage of vegetable oil); or third, utilise ‘shrinkflation’ (sell in smaller quantities at the same price point to counter the effects of the supply shock).”
Slippery slope ahead
According to Fitch Solutions, Russia exported 2.3m tonnes of vegetable oil, with 1.19m tonnes going to China and India combined.
On the other hand, Ukraine exported 3m tonnes, or almost thrice the amount compared to Russia, to China and India combined.
However, there would be a drop in supply from Ukraine due to the conflict, and Russia is unlikely to meet this supply deficit, added Dunlop.
Consequently, India and China will source from other markets because of their significant bargaining power. However, the increased demand and reduced supply will place major stress on oil prices.
Fitch Solutions also presented the percentages of market exposures of various countries to Ukraine.
For example, the exposure of India to Ukraine is 74.3%, while China stands at 59%.
Other Asian countries that will face some forms of impact are Malaysia (exposure to Ukraine at 58.1%), Saudi Arabia (65.6%) and South Korea (56.3%).
The issue is exacerbated by supply chain problems for alternative oils in India and China due to climatic and extenuating factors, like drought and COVID-19 lockdowns.
Dunlop also drew attention to the consumers’ plight in India and China, with a high proportion of the lower-income households still reeling from the economic effects of the pandemic.
Besides the price hike, the limited supply may cause civil unrest in such populations.
Higher food price inflation heightens risks of social unrest, such as the 2008 rice crisis and the Egyptian government removing subsidies on bread around the period of 2011 to 2012.
“It is a difficult situation. When you speak of increased oil prices, 10 cents, for example, may not be a lot for the Western consumer and those with higher purchasing power. Manufacturers may even absorb the cost too. In the West, there are also well-priced alternatives that they can turn to, such as olive or avocado oil.
“But in Asia, oil tends to be the final consumer good; therefore, the consumer is more susceptible to price changes. If there is a supply change, it can lead to a price increase and affect the consumer,” he said.
The projection for the next six to 12 months
In the short term, Dunlop highlighted the “big risk” of constrained supply of raw goods because Russia and Ukraine are important players in key commodities that keep global supply chains going. Besides vegetable oil, they are also huge players in barley and wheat.
With the oil supply shock, prices will also dictate the market for the next one year, he added.
Another risk was the probability that countries could halt exports of their oil supply and do not acknowledge the importance of keeping the supply chains running through international trade.
“However, I think there will be government support (to mitigate the issue of climbing oil prices) for consumers and firms,” said Dunlop.