‘Trade agreements should incorporate CPO import quota’

An interview with Abdul Rasheed Jan Muhammad, Director Westbury Group

Abdul Rasheed Jan Muhammad is Chairman of Pakistan Edible Oil Refiners Association (Peora) as well as the director of Westbury (Pvt) Limited and Dalda Foods (Pvt) Limited. He has been associated with the edible oil sector for more than three decades.

BR Research met up with Jan Muhammad to learn about the challenges faced by the edible oil sector and the way forward for its development. Here are edited excerpts of the conversation:

BR Research: Can you give us an overview of the Westbury Group?

Abdul Rasheed Jan Muhammad: Westbury Group is a holding company. Under the Westbury umbrella we have a synergy in the edible oils sector.

We started as an import agency representing a few Malaysian suppliers. These suppliers invested in Pakistan in the form of joint venture in 1993 with the Westbury Group, and the main company signing the joint venture was Federal Land Development Authority (Felda). This JV was witnessed by Prime Minister Dr. Mahathir Mohamad from Malaysia and the then Minister of Industries, IIlahi Bukhsh Soomro, from Pakistan in 1993.

That is how Malaysian FDI in the edible oil sector started flowing in. Our first project was to set up bulking installation to store palm oil and palm olein. By 1995, under the name of Mapak Qasim Bulkers (MQB), we started operations with the capacity of 13,000 tons, which is now expanded to 138,000 tons.

After MQB terminal, we put up an edible oil refinery at Port Qasim and then later a dedicated edible oil jetty, which is a BOT (Built-Own-Transfer) project with Port Qasim Authority. Fourth project was a crushing plant; we import soybeans and canola seeds, crush them and refine the oil in our refinery. Crushing seeds also produces meal, which is sold to the poultry feed industry.

BRR: Can you also tell us how Dalda and Tullo came under the Westbury umbrella?

ARJM: Unilever Pakistan decided to disinvest from the edible oil sector similar to Hindustan Lever, which sold their Dalda brand in India and Bangladesh in 2003. The reason was that edible oil was high capex low margin business unlike FMCG products like detergents etc.

So in 2004, we participated in Unilever’s tender for their Edible Oil business and acquired Dalda brand and its factory. In 2009-2010 we acquired Tullo from Wazir Ali industries.

BRR: Given ghee’s importance, what impact would the Punjab Food Authority’s ban on ghee have on the local market?

ARJM: Punjab Food Authority has not banned ghee. It is an incorrect perception. PSQCA has given a formula about blending of oil to make ghee. Soft oils’ blend is essential for making qualitative ghee. Qualitative ghee/vansapati is trans-fat free. Pakistan has institutions to ensure that ghee without proper hydrogenation and blending is not introduced in the markets.

BRR: From your drift, it would appear that the edible oil sector is not expecting the ban on ghee to be enforced by 2020.

ARJM: I don’t think the ban will be imposed and I hope it is not. It is not practical to ban ghee because cooking oil is a lot more expensive. Further ghee/vanaspati is a necessity and same is indeed a healthy food product if made properly.

Cooking oil is made of canola, sunflower, and soyabean oil. These oils are at least $100-$150 per ton more expensive than palm oil and also have higher duties levied on them. The common man will not be able to afford cooking oil if ghee is banned. I am absolutely convinced that ghee is much healthier.

BRR: Is the cooking oil consumption increasing in comparison with ghee?

ARJM: Previously the perception was that cooking oil belongs to the urban areas whereas ghee is preferred by the rural areas. But now cooking oil is getting popular in the rural areas as well. Right now the market is probably 60 percent ghee and 40 percent cooking oil, previously the proportion was 80:20. It could be a matter of change in tastes.

BRR: If ghee consumption is reduced drastically, would Pakistan’s palm oil consumption and hence imports decrease?

ARJM: Not necessarily, as import volume is going up due to increase in population. If soft oil imports would rise, their imports will become more expensive than palm oil.

BRR: Why are these oilseeds not grown here?

ARJM: Firstly, for a crop to be grown in Pakistan, good support price needs to be given. Sugarcane, rice, and wheat have much higher support prices than oil seeds. Secondly, the acreage under wheat is so high that we have surplus wheat. As a result, Pakistan exported wheat this year for which a hefty subsidy had to be provided. We have requested the authorities that area under wheat, which is producing in excess of domestic requirements should be given over to oil seeds for cultivation.

BRR: We have the potential to grow oil seeds, but what about the potential to grow palm oil trees?

ARJM: In the latter half of 1990s, there was a seminar on the subject of palm cultivation. Malaysia had given seeds for sowing and the goal was palm cultivation in Pakistan. Stakeholders were invited to discuss feasibility.

At that time, I had expressed my reservations since palm trees cultivation requires a lot of water, which we do not have sufficient access to. This reservation was not considered and coastal areas of Thatta and Winder were chosen to set up projects. 20 years later today, neither of the farms has been able to produce any crude palm oil (CPO).

Palm oil fruit has a cycle of seven years. It is possible that fruit were grown but since they did not put up a CPO mill, the fruits could not have been crushed.

BRR: What is your opinion about the FTA/PTA signed with Malaysia and Indonesia respectively?

ARJM: Honestly speaking, I am not a great fan of FTAs & PTAs for import oriented economies. Under these trade agreements, the government has given 15 percent discount in import duty on palm oil imports but has not received concessions in return despite being one of the largest consumers of palm oil.

For example, Malaysia buys 1 million ton of rice but not even 100,000 tons is exported from Pakistan. Yes, it makes sense for them to buy it from nearby Asean countries but as one of the largest consumers of palm oil and signatory to FTA, we should have been able to leverage our purchasing power to convince them into buying rice from us.

Since palm oil is mostly exported by Malaysia and Indonesia alone, giving them preferential treatment means that the government is compromising on tariff revenue. That should be compensated by increase in exports, which is the purpose of any FTA.

Let me give you another example. FTA with Malaysia was signed three years before PTA with Indonesia. Bulog is an Indonesian government agency, which is a big importer of rice. Pakistan should have ensured rice contracts from Indonesia before giving them same preferential tariffs as Malaysia.

Whenever we talk about these trade agreements, we talk about exporting kinnow. Palm oil is worth $550 per ton whereas kinnows are not even $50. While Pakistan does not have products worth $550 per ton to balance out imports, it does have rice valued at $350 per ton, which we should export instead.

When we crush oil seeds, we get meal which is exported to Indonesia but the bulk of it is sourced from Asean countries though it too can become part of our trade agreement.

BRR: Speaking of meal, can Pakistan benefit from the US China trade war to export to China?

ARJM: The US soybean market has fallen because China was their biggest importer and China is not buying from USA due to trade war. Since soft oils, oil seed prices, and palm oil prices are interlinked, we have benefited from lower prices but this had led to volumetric growth in imports.

Coming to your question, Pakistan does not have access to China’s meal market.

License is needed to export GMO Meal to the Chinese market but despite repeated attempts; we have not been able to get the license. This is a big market that we are not able to tap and given the trade war, now is the right time to do it.

BRR: Why have we been unable to get license?

ARJM: In Pakistan, three institutions are involved: Ministry of Food Security, which makes the import/export rules; Ministry of Climate Change that provides permission for GMO import and export; and Department of Plant Protection for phytosanitary standards. Coordinated efforts are needed from all three Institutions to have some appropriate modus operandi for the export of meal to China.

Furthermore, we have to get a license from China that will allow us to export GMO meal. Our association is already working on this subject as we believe there is huge potential of meal export, which is not only good for our seed extraction industry but also for Pakistan. This case needs to be pursued more in the upcoming visit of our Prime Minister to China.

BRR: Regarding developing the local edible oil refineries, what can be done about the export tax structure of Malaysia and Indonesia that restricts exports of crude palm oil (CPO)?

ARJM: Pakistan set up its edible oil refineries in 2006, graduating from the batch system to continuous technology, which is used globally. We used to import CPO, refine it and get 94 percent refined palm oil and 5 percent fatty acids distillate, which was used by the soap industry. The rest was processed loss.

Unfortunately, Malaysia and Indonesia imposed export tax on CPO, which made this product completely unviable for our refineries. Similar to our PSX, they have a Malaysia Derivative Exchange (MDEX). If the MDEX is above RM 2250, an export tax of minimum 4.5 percent is imposed. It is a slab system with the highest rate of export tax being 10 percent. Since then, CPO imports from Malaysia dwindled away because its C&F value became higher than imports of refined oil.

Similarly, Indonesia has a structure to restrict CPO exports. They encourage export of refined palm oil/olien instead of crude palm oil.

This resulted in Pakistan’s edible oil refineries not being able to process palm oil (we shifted to soft oils but it is a smaller volume). Initially, we took this matter up with the Malaysian and Indonesian authorities directly but could not make headway. Then we went to Ministry of Commerce and FBR to request them to leverage the trade agreements but we were never invited during FTA / PTA negotiations, and this matter has not been addressed as yet.

The US China trade war has resulted in a falling market. In October and November, the MDEX was below RM 2250. Indonesia and Malaysia have excess stocks on their hands. Since MDEX is below RM 2250, export of CPO has commenced, which will allow our refineries to operate for a short time period.

BRR: Are there any solutions that can circumvent this problem and allow Pakistan’s refineries to continue operating?

ARJM: Our suggestion is to fix a quota system. We should be given by Malaysia / Indonesia at least 500,000 tons of export tax free CPO and if we import more than export tax can be formulated. This will ensure a continuous supply of CPO to allow our refineries to operate.