Competition and regulation: The right recipe for edible oil

Representational image. Photo: Collected

Bangladeshis consume 20 lakh tonnes of edible oil annually, while local production hovers at only around 2 lakh tonnes. The remaining 18 lakh tonnes are imported, comprising 46% soybean oil and 53% palm oil.

Both authorities and consumers are dissatisfied with the retail price of edible oil, accusing businesses of "over-profiting" through collusive practices that lead to sudden price spikes. 

Interestingly, while the government sets the retail price of edible oil, it has failed to effectively regulate the market. This scenario mirrors the global market, with the key difference being that other markets are open to competition, whereas Bangladesh's market is heavily regulated.

According to media reports, global supplies of edible oils have been in crisis since 2021 due to pandemic-induced freight disruptions, labour shortages, and climate-related issues. 

Amidst this international supply crunch, China has ramped up its stockpiling of food and cooking oil to meet the needs of its 1.41 billion population. China's aggressive purchasing, coupled with the Russia-Ukraine war, exacerbated the situation in early 2022, leading to a shortage of edible oils in the global market.

Palm oil, the world's most consumed vegetable oil, was among the casualties of the Covid-19 lockdowns, which restricted the movement of migrant workers essential for Malaysian palm oil plantations. As a result, yields in Malaysia, the world's second-largest producer of palm oil, fell to a 40-year low last year. 

Droughts also reduced the canola (rapeseed) crop in Canada and diminished soybean harvests in Brazil and Argentina. Faced with domestic supply shortages and price hikes, oil-producing countries such as Argentina and Indonesia implemented protectionist measures, including halting or limiting exports.

Argentina suspended export registration for soybean oil after drought-affected yields. The country had previously supplied 48% of the global soy oil market. Similarly, Indonesia imposed export restrictions in 2022, which were only recently lifted. 

Meanwhile, consumer countries have been struggling to alleviate the burden on their populations by reducing taxes and increasing subsidised sales. 

In March 2022, Bangladesh removed a 15% value-added tax (VAT) on oil refining, a 5% VAT on retail, and a 15% VAT on imports. The government has also been offering edible oil to low-income households at subsidised rates through the Open Market Sales (OMS) programme.

Bangladesh imports 80% of its palm oil from Indonesia and 20% from Malaysia. Following Indonesia's export restrictions, palm oil prices surged by at least Tk300 per maund (equivalent to 40.90 litres) in Chattogram's Khatunganj, the largest essential commodity hub in Bangladesh, according to local media reports.

The panic over the palm oil export ban also drove up soybean oil prices, with traders in Khatunganj reporting price increases of Tk700–1,100 per maund within two weeks.

"We will not be able to produce or refine oil if we cannot secure raw materials from the global market," said the CEO of a Bangladeshi conglomerate. 

He noted that sunflower oil could be an alternative to soybean and palm oil, but the Russia-Ukraine war has disrupted sunflower oil supplies. "Bangladesh might bear the brunt of the ban, as we have limited alternatives available in the global market," he added. A senior executive at a mill warned, "If we cannot import raw materials, the supply of edible oil to the domestic market will collapse."

"Many businesses failed to sustain their edible oil operations due to losses caused by price volatility in the international market," said a trader in Moulvibazar, one of the country's largest wholesale kitchen markets. However, this is only part of the story. "A section of businesspeople took out bank loans to buy land and set up oil refining facilities, expecting high returns," said a former regional manager of the Malaysian Palm Oil Council. 

"But they did not achieve those profits and instead suffered losses," he added, noting that unhealthy competition among market players also forced many out of business.

Government actions have also contributed to the shutdown of several refiners. The caretaker government in 2008 forced oil refiners to sell their products below import costs, leading to the closure of 17 out of 32 local edible oil processors. The industry faced another significant setback between 2012 and 2015 when major players such as 

Noorjahan Group, SA Group, Eliash Brothers, and Mustafa Group ceased operations. Consequently, many small entrepreneurs exited the edible oil business between 2008 and 2010 due to unsustainable losses. Later, loan defaults and aggressive business practices led to further closures.

Today, 11 companies dominate the imported edible oil market, with Bangladesh Edible Oil, TK Group, City Group, S Alam Group, and Meghna Group controlling the majority share. These conglomerates consolidated their positions by capitalising on the sudden exit of other industry giants.

TK Group, a major player in the country's consumer goods and industrial sectors, has initiated significant investments to transport its own edible oil imports using its own vessels. Some refiners located in export processing zones (EPZs) benefit from deferred payment terms for imported raw materials, while those outside EPZs must pay taxes upon the release of consignments from ports. This has created an uneven playing field among refiners.

Industry insiders note that although several new companies, including Bashundhara Multi Food Products, Smile Food Products, Sena Edible Oil Industries, and Delta Agro Food Industries, entered the market between 2016 and 2022, they have yet to make a significant impact.

Data from the National Board of Revenue (NBR) shows that nearly 25.7 lakh tonnes of soybean and palm oil were imported in 2023, with major companies accounting for 80% of the total.

These companies now cater to about a quarter of the demand for edible oil, compared to just 10% a decade ago, indicating a tripling of their collective market share. Market players claim there is no opportunity for excessive profit, as various government agencies continuously monitor the market. However, some large companies have exited the market due to government policies.

Millers purchases crude oil from the volatile global market, where prices can fluctuate within a single day. However, the government fixes retail prices for extended periods, forcing millers to sell at predetermined rates.

The Control of Essential Commodities Act, 1956, empowers the government to regulate the production, storage, transport, supply, and trade of certain commodities. The Ministry of Commerce determines the price of edible oil under this law, which contradicts the principles of the Competition Act.

Recently, Shun Shing Edible Oil Ltd (SSEOL) merged with Bangladesh Edible Oil Ltd (BEOL), strengthening BEOL's position in the market. BEOL, a joint venture between Singapore's Wilmar International Limited and India's Adani Group, announced on 4 July 2024 that it had taken over all operations of SSEOL as of 3 June 2024. The High Court approved the merger on 13 February 2024, though it was not reviewed by the Bangladesh Competition Commission.

BEOL described the merger as a significant milestone aimed at consolidating operations and enhancing efficiency in a competitive environment. BEOL, along with TK Group, City Group, S Alam Group, and Meghna Group, now controls roughly 80% of the market.

The global supply situation, lack of market analysis by the Competition Commission, government-imposed price controls, and the dominant position of a few millers have created conditions ripe for market manipulation. If this situation persists, more millers may exit the market, further consolidating the dominance of a few players. 

The Competition Commission and other regulatory authorities must work together to reform the market, promote fair competition, and ensure that all stakeholders—consumers, refiners, and traders—benefit equitably. Policy support is needed to encourage investment and foster competition in the edible oil sector, which are proven methods to prevent market manipulation.

Sketch: TBS

M S Siddiqui is a Non-Government Adviser, Bangladesh Competition Commission, Legal Economist and CEO, Bangla Chemical, e-mail: shah@banglachemical.com

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.