The ongoing war in Ukraine, which is the world’s largest sunflower grower, is likely to result in at least 25 per cent or 4-6 lakh tonnes of crude sunflower oil supply shortages in India next fiscal year, a report shows.
About 70 percent of crude sunflower oil comes to India from Ukraine and about 20 percent from Russia.
The balance sheets of domestic edible oil processors are healthy enough to withstand supply disruptions caused by Russia’s invasion of Ukraine but will have something to do with the production plans of domestic edible oil processors, rating agency CRISIL said on Thursday.
Refined sunflower oil makes up 10 per cent of the country’s consumption of 230-240 lakh tonnes of edible oil per year, and nearly 60 per cent of demand is met through imports.
As much as 90 per cent of the country’s annual crude sunflower oil requirement of 22-23 lakh tons comes from Ukraine (70 per cent), Russia (20 per cent) and the rest from Argentina and other countries.
“Supply disruptions caused by the Russia-Ukraine conflict could result in a supply shortage of at least 4-6 lakh tonnes of crude sunflower oil for India’s next fiscal,” CRISIL Rating said.
Cumulatively, Ukraine and Russia export 100 lakh tonnes of crude sunflower oil annually, with Argentina in third place with 7 lakh tonnes in outbound shipments, the report said.
According to the report, the problem is that Russia’s major banks were disconnected from the SWIFT system after it invaded Ukraine and as a result of sanctions imposed by the US and European countries. Although trade in food products with Russia was not prohibited, trade settlements became difficult, leading to supply disruptions.
Domestic edible oil processors typically maintain an inventory of raw materials for 30-45 days, which should help them cope with supply shocks in an immediate period of time. However, supply and prices will begin to be affected if conflicts, and attendant trade disruptions, are prolonged.
Prolonged trade disruptions will push edible oil processors to get more crude sunflower oil from Argentina. This, however, will not be enough to compensate for the shortage of materials in volume from Ukraine and Russia. The report says that to reduce the resulting idle capacity, processors can choose to filter other edible oils.
The supply disruption was also against the backdrop of a 25 per cent year -on -year increase in the average price of refined edible oil this fiscal while the price of crude edible oil has increased due to supply -side factors.
For example, crude soybean oil has soared following poor crops in Brazil, while crude palm oil has increased due to weak production in Indonesia and Malaysia, the world’s leading producers.
Soybean oil and crude palm oil make up more than 75 percent of the country’s edible oil imports. Any further increase in raw material prices will prompt processors to increase additional debt to meet additional working capital requirements.