Analysis of the case
This case provides thorough understanding of the Edible oil industry in Pakistan and how it has changed and evolved down the years. The case highlights different macro and micro environment factors which have an influence in shaping up the market of edible oils. Initially, Desi ghee was the most widely used edible oil in Pakistan. However, with the passage of time, there was a shift in trend from desi ghee to vanaspati ghee because of the limited supply of desi ghee could not keep up with the escalating demand. And in recent years, the increased health awareness among the public has led to a shift from vanaspati ghee to vegetable cooking oil. The increase in population and per capita income has caused edible oil consumption in Pakistan to increase six times over the last 30 years. This growth in consumption was leveraged by imports which were highly influenced by volatile oil prices in Pakistan. The case also discusses the nutritional value of saturated and unsaturated edible oils. Research shows that desi ghee and butter has saturated fat and vanaspati ghee (hydrogenated vegetable oil) has Trans-fat which increases the level of “bad” cholesterol also known as LDL. This increases the risk for heart disease and atherosclerosis. The processing of vanaspati ghee is also harmful to human health because nickel is used as a catalyst to prepare vanaspati ghee which is highly toxic and adversely affects human health. Inadequate checks on edible oils have also allowed producer’s to simply repackage processed palm oil which has very high levels of saturated fat and can be very harmful to human health. Vegetable oil such as canola oil, sunflower, soybean, olive and corn oil were the healthiest of vegetables oils with less than 15% saturated fat contents. There were number of reasons due to which oilseed agriculture failed in Pakistan such as high production cost, technical problems faced by the farmers and lack of seed technology. Cottonseed plantation was driven by the market conditions in textile industry which made it a volatile input for oil processing industry. Cottonseed also had moderately high saturated fat content which made it an unpopular choice for consumption. Other traditional oilseeds such as rapeseed/mustard have declined by 20% over the years whereas areas under cultivation for groundnut and sesame have increased by 100% and 250% respectively over past two decades. The government launched various incentives in 1988 to promote the cultivation of oilseed. These initiatives also failed because of unsupportive government pricing policy which supported growth of cotton, wheat and sugarcane over oilseed. Secondly high import prices of hybrid crop seeds drove high input cost for oilseed farmers. Thirdly support prices for oilseeds had not been sufficiently high to create strong and durable incentives for farmers. Oilseed farmers, who were mainly peasants, complained of being manipulated by the large scale importers of palm oil which led to the failure of the initiatives. The major products in oilseed organizational complex are various forms of edible oil. To prepare edible oil, crude oil under goes processing through extracting and refining. Three methods are included in extraction process: * Kohlus: were bullock driven village mills which were used to crush oilseeds using mortar. * Expellers: It is the least efficient, due to lack of preparation technology to dehull oilseeds before crushing. * Solvent extraction plants: It is the most efficient method of extracting oilseed The refining process includes steps such as hydrogenation, bleaching, deodorizing and canning. Crude oil is mixed with dilute caustic soda to remove fatty acids in oil and then bleaching it to remove the color and deodorizing it to make the crude oil flavorless. Hydrogen is then bubbled through the liquid oil with nickel as the catalyst at high temperature to make refined vegetable oil into vanaspati ghee. Vanaspati ghee is packed into tins while vegetable oil is sold in tins and plastic bottles. The problem in packaging was that the labeling only stated “cooking oil” which exploited the consumers as the suppliers only sold tins of 100% imported palm oil with local brands of cooking oil. This practice affected domestically produced oils. The organized vegetable oil extraction industry comprised of 124 solvent extraction units. These extractors primarily focused on canola oil extraction and sunflower seed oil extraction. Solvent extractors sell their edible oil products to ghee manufacturers as inputs. The relationship between the two was constrained because domestic oilseed cultivation could only provide the solvent extractors with only 10 to 15 days’ worth of supply. The support prices offered by the government was worthless to both the extractors and farmers which resulted in a situation that extractors forced farmers to sell oilseeds at price below the support prices to them so that their ability to pay oilseed farmers are not severely constrained by the pressure from Malaysian palm oil exporters. The ghee industry in Pakistan was nationalized in the early 1970s by people’s party government but low profits, decline in market capitalization and low revenues resulted in the 94% of ghee industry being privatized in 2004. The industry not only faced high import duties but also faced illegal competition from the tribal areas of NWFP who not only were excused from sales tax and custom duties but they consistently violated the ban imposed on them of not selling the products outside their own area. The key players in this industry are Dalda oil, Habib oil, Wazir Ali industries, Kashmir edible oils and Associated industries.
Current Industry Analysis
Several studies, analysis and market surveys show that Pakistanis have become more health conscious over time. Pakistanis are now shifting their nutritive habits from animal saturated fats such as desi ghee and butter to healthier products such as vegetable saturated fats (ghee) and finally to even more healthier products such as vegetable unsaturated fats (canola, sunflower, soybean oils). In rural and backward areas of Pakistan which still lack awareness, the consumption of ghee is still relatively higher than in urban areas. Cooking oil and ghee industry covers a large manufacturing sector of Pakistan. Around 115 units, that are the listed members of Pakistan Vanaspati Manufacturers Association, produce vegetable ghee/Cooking oil with an installed capacity of around 2.8 million tones. Actual production against this capacity is around 1.8 million tons of Vegetable ghee/Cooking oil which comes out to be around 44% of the installed capacity. The gap between yearly consumption and production from registered firms is around 1.8 million tons, which is provided by hundreds of unregistered firms. Yearly rise in edible oil consumption is almost about 7.7% due to rise in per capita income and population growth. At present it is a 384 billion rupees industry. The Pakistan edible oils industry has grown immensely since independence in 1947 from a production of 4000 tons per day in 1950 to a production of 72500 tons per day in 2007. During the seven years, the average annual growth for ghee/edible oil manufacture is about seven percent. The total annual domestic demand of edible oil in our country is about 2.9 million tons. The production of edible oil in Pakistan is nearby 1.3 million tons per annum. The rest of the demand is being met through imports. Imported palm oil constitutes around 58 % of all oil used for production of edible oil in Pakistan. The production statistics of vegetable ghee taken from the Economic Survey of Pakistan 2009‐2010 for the period from 1990‐2010 gives an overview of the rapid growth in oil and ghee manufacturing sector of Pakistan.