Palm oil slide boosts soap companies; price cut unlikely

Soap manufacturers are upbeat about softening palm oil prices, but are unwilling to cut product prices as they are still ruling high on a year on year basis.

Toilet soap majors Hindustan Unilever Ltd (HUL) and Godrej Consumer Products Ltd (GCPL) see their margins going up this financial year, after straining under reduced margins over the last two years, with palm oil prices falling sharply.

Palm oil, a key raw material for toilet soap companies, saw nearly 18% drop in prices to Rs45,700 per tonne in June — the lowest in seven months after prices hit a three-year high in February at Rs58,320 per tonne, according to Edelweiss Securities Ltd.    

The commodity, which accounts for about half of a toilet soap’s input costs, could see further softening, but companies say prices are still 15-20% higher year on year, and price cuts does not seem to be on cards too.

“Price cuts are not at all likely as we had not taken up prices in line with the highest raw material prices,” Adi Godrej, chairman, Godrej Consumer Products Ltd, said.

GCPL that makes Godrej No. 1 and Cinthol brand of soaps has a market share of around 10-11% and is the second largest soap maker in the country after HUL, the maker of Lux, Lifebuoy, Dove and Breeze. Wipro Consumer Care that has an 8% market share sells Santoor brand, and recently acquired brands Aramusk and Moloy. ITC has a presence in toilet soaps through Fiama Di Wills and Vivel brands.

Wipro Consumer Care said it will take a wait and watch approach on pricing. “With palm oil prices expected to slip further in 2011, HUL and GPCL are likely to benefit on the margin front, which had been adversely impacted in FY11,” Edelweiss Securities Ltd analysts Abneesh Roy and Harsh Mehta wrote in a note to clients on Monday.

“We expect fall in palm oil price to help cushion the impact of higher freight cost due to hike in diesel price,” they wrote.
Soaps make up for 21% of HUL’s sales, while for GCPL it is 25%.

Last fiscal, all soap players hiked prices 5-10% led by a 50% increase in palm oil prices. Consumer goods categories like detergents, soaps and biscuits are highly competitive and highly impacted by raw material prices, which make it difficult for players to have a pricing edge in these categories.

HUL’s soap and detergent Ebit (earnings before interest and taxes) margin declined from 25% in calendar 2004 to below 8% in the second half of fiscal 2011, an India Infoline of report said this week.

Malaysia and Indonesia supply 80% of global palm oil output. The commodity closed at 3060 Malaysian ringgits on Kuala Lumpur Composite Index (KLCI) on Tuesday, much higher than 2400 ringgits a year ago. According to Palm Oil HQ, an online source on palm oil news, going ahead this year, prices may fall more as improving weather in major oilseed growing regions may boost supply of global vegetable oils. “The recent price slump also spurred buying interest in physical markets, with Chinese and Indian importers securing their requirements for the forward months, supporting futures. Traders expect end-June exports to reach 1.42-1.45 million tonne compared to 1.35 million tonne in May,” Palm Oil HQ said on Tuesday.