Ethiopian Business Review

Local Edible Oil Producers Thrive in Hard Times Featured

The local edible oil industry is thriving. Reversing the decades-long preference for imported brands, more local oil brands are now available in major trading areas. As consumers start to become wary of the health implications of imported palm oil, opportunities are opening up for local producers. However, the rise in the numbers of local producers does not mean their market share has improved. Because of the low level of attention given to the area by the government, local producers are facing shortages of raw materials. EBR’s Ashenafi Endale spoke to consumers, producers, government officials and experts to shed light on the matter.

Whenever Lemlem Getachew used to go out grocery shopping, she found it difficult to find locally produced edible oil. But lately, it is getting easier and easier. Shopping at the biggest supermarket in the capital, Shoa Hypermarket, she’s started to find more local products on the shelves. Surprisingly, there is a wide selection of brands, making it convenient to choose the finest. “Until recently, it was difficult to find a single locally produced edible oil in the supermarket. Now there are five,” she says.

Lately, the number of edible oil producers has been ballooning. Growing health concerns on the part of many residents has caused many to turn their backs on subsidized imported oil from the government. But choosing not to buy subsidized oil means that people are spending more money, even though local producers are in a position to reap the opportunity created by this.

Right now, the price of local edible oil, on average, is ETB79 a liter, while imported edible oil of the same volume is sold for ETB102. The price range differs depending on the volume. Even though there has been a decline in price as the number of local producers increase, some customers, including Lemlem, are not still satisfied. “The oil producers get raw materials locally. With this in mind, the price should have at least halved,” Lemlem says.

There are currently over 1,000 micro and small edible oil producers in the country, and 27 medium and the large edible oil producers, according to the Ministry of Trade and Industry (MoTI). The number has almost doubled from a decade ago. While some of the new producers use outdated machines to produce oil, a few of them employ traditional methods by using household processors. But most producers of the oil that is available in supermarkets and kiosks in Addis use relatively modern machines. Tena, Kokeb, Dukem, Sunflow, Kibe Lemene and Addis Modjo are some of the local businesses whose products are available in the capital.

The influx of local producers does not necessarily mean that demand is being met. Generally speaking, only 41.3 million liters of edible oil is supplied monthly, which only satisfy 60.2Pct of the national demand, which is calculated based on the assumption that an individual needs 0.72 liter of oil monthly. Out of the total supply, subsidized palm oil, which is imported and supplied by government-chosen companies, constitutes over 96Pct, according to the Food, Beverages and Pharmaceutical Industry Development Institute. This is followed by local processors and private importers, each of which satisfy two percent of the national demand.

The gap between demand and supply provides an opportunity for businesses. According to producers EBR spoke to, price is the main competitive factor, but availability of products and quality also matters. While low income earners prefer to use subsidized oil, those with higher incomes prefer imported ones. But due to the fact that private importers face difficulties in accessing hard currency, imported oils tend to become expensive or hard to find, which gives local producers a chance.

Despite the opportunities, however, local producers are still challenged by the state monopoly. “Many local and foreign investors are interested in this sector but are discouraged by the government monopoly,” argues a marketing officer at one of the local edible oil producing companies.

Although many local companies have penetrated the import-dominated market with relatively good quality and attractive packaging, the share of locally produced edible oil out of the total supply has dropped from 10Pct to 1.6Pct over the past decade, because the supply of palm oil by companies hand-picked by the government increased: they imported 25 million liters of palm oil a month between 2010/11 and 2014/15. But after 2015/16, this figure grew to 41.3 million liters.

Five private companies, Alsam, AHFA Plc, Biftu Adugna Business S.C, Hamaressa Edible Oil S.C, and Belayneh Kinde Import-Export, and five endowment companies, including Guna, Biftu, Ambassel and Dinsho, were chosen by the government to supply palm oil. The state-owned Alle Bejimla was also one of the importers, before it recently went bankrupt. Although the palm oil imported by these companies increased, it hasn’t met demand.

The same is true for local producers, who are not exhaustively using the raw material available in the country. Although oilseeds are the main raw material needed in the production of edible oil, neither local producers nor the government is not in a position to reap the benefit.

Total oilseed production, which includes niger seed, linseed, groundnut, sunflower, sesame and rapeseed, slightly increased from 7.266 million quintals in 2012/13 to 7.754 million quintal in the last main harvesting season, according to data from the Ministry of Agriculture and Livestock. The production of sesame in particular increased from 1.8 million to 2.1 million during the same period.

While the local consumption of oilseeds particularly by edible oil producers exhibited a marginal improvement, the export volume of oilseeds showed a better increment from 2.8 million quintal five years ago to 3.2 million quintal in the past fiscal year. Yet, the export earnings from oil seeds declined from USD440.9 million to USD345.29 million in the same period.

Still, oil seeds fetch a better price on the international export market, rather than when they are sold locally. A quintal of sesame, which is ready for export, for instance, is sold for ETB6,401 as of April 30, 2019 on the Ethiopian Commodity Exchange. This means local producers must offer higher prices than this.
 “If we buy at this price, in order to maintain a 10Pct profit margin we have to sell a liter of sesame oil for ETB130,” explains Eyob Woretaw, operation director at Addis Modjo Edible Oil Complex, Addis Ababa division. “Nobody is willing to buy locally produced edible oil for over ETB80 per liter.”

Addis Modjo was established in 1997 as an amalgamation of the former state owned Addis Ababa Edible Oil Factory and the Modjo Edible Oil factory. They were acquired by Amibara Agricultural Development Plc in 2008. Addis Modjo has a capital of ETB110.2 Million, according to Mohammed. It uses alternatives like cabbage seed, cotton seed, sunflower and other cheaper raw materials instead of other oilseeds. For instance, Addis Modjo buys a quintal of sunflower with ETB1,200. The production cost per liter is ETB62 and the company sells it to wholesalers at a one birr profit margin. Despite its attempts, the company has not been able to utilize more than 30Pct of its production capacity, chiefly because the recurring shortage of raw materials.

“Alternative raw materials are seasonal and involve many intermediaries. They are also of poor quality, which highly decreases our output. There is no continuous supply, since there are no commercial farmers who produce the raw materials in bulk. Because of this, our plants are closed for half the year,” adds Eyob.

The soaring prices of plastic packaging is another challenge faced by producers. For instance, a one liter plastic oil package costs five birr, which pushes producers and wholesalers to reduce their profit margins. “We supply oil to shops and supermarkets with a maximum two Birr commission, which is discouraging,” says Eyob.

According to industry insiders EBR spoke to, the reasonable average profit margin that should be earned by edible oil producers is 15Pct. Many producers, however, have profit margins below 10Pct. “The working environment is really unfair because importers are subsidized and local processers are discouraged,” argues Eyob.

The imported palm oil, which is sold for around ETB27 per liter, is three times cheaper than the average price of edible oil processed by medium scale companies. Apart from being subsidized, the government-picked importers are subsidized and have continuous hard currency supply, adding to the privilege to import duty free and sell VAT free, among others.

“How can we compete with such highly privileged companies? Government has burden to feed the low income, but that should not be at the expense of local producers. We have no raw materials, we have no hard currency access to import raw materials in their crude form and process it locally,” says Mohammed Yusuf, executive director of Addis-Modjo.

Frustrated by the state monopoly, producers has established the Ethiopian Edible Oil Producers and Manufacturing Industry Association in May 2018 in order to negotiate with the government and lax the state dominated market. “The Association is trying to work with the MoTI,” says Mohammed.

According to an official at the MoTI, who spoke to EBR on the condition of anonymity, the five companies and four endowments should return the subsidies they have taken, if they do not engage in local production and import substitution as they promised. “Government must investigate under what procedure they were handpicked and monopolized the market in a free market economy,” the official says.

Wondimu Filate, director of Public Relations Directorate at the MoTI, on the other hand, argues that the subsidy mainly targeted the poor population. “The companies were picked after they promised to establish factories and engage in local production gradually. However, that could not be realized.”
A study dubbed ‘The Government’s Exit Strategy from Edible Oil Trade’, conducted by the former Ministry of Trade in 2018, also concluded that the government has to give due emphasis to import substitution rather than subsidizing palm oil imports. The study recommends two solutions: the government must help private owned local industries to thrive or involve in its own.   

Yet, the government seems to favor the first option. Recently, the government announced its plan to give more spaces for domestic investors in the four agro-industrial parks that are under construction in different parts of the country, according to Wondimu.

8th Year • May.16 - Jun.15 2019 • No. 74

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