Shakil Ashfaq has been involved in the edible oil business since 2000 when he co-founded Shujabad Agro Industries (Pvt) Ltd. and setup the first oilseed crushing unit in Karachi. The company also manufactures and markets cooking oil and banaspati brands Eva and Maan.
Shakil Ashfaq has been elected as the President of the All Pakistan Solvent Extractors' Association (APSEA) for the 2018-19 term. He has also served as the President of Bin Qasim Association of Trade and Industry (BQATI) and as Executive Committee member of Pakistan Vanaspati Manufacturers' Association (PVMA).
BR Research recently had a conversation with him regarding the importance of promoting domestic production of oilseeds and the challenges faced by the edible oil sector. Here are the edited excerpts.
BR Research: Pakistan has very high edible oil and oilseeds import bill. What can be done to reduce it?
Shakil Ashfaq: There needs to be a long term holistic nationwide policy of edible oil, based on three major objectives. First and foremost is the growth of local oil seed crops. Right now our indigenous oilseed crops account for less than 12 percent of total edible oil consumption which is alarming. Our edible oil and oilseed import bill has exceeded $3.5 billion. We must significantly increase our local oilseed crops volume.
Second important aspect is value addition. We need to follow the basic economic principle of value addition for our imports. For instance, we should concentrate on importing crude palm oil and refining it locally rather than importing finished products.
Thirdly, we need to promote the health aspect. An estimated 60 percent of our consumption is of banaspati ghee with 40 percent being cooking oil. Nowhere in the world is the ratio this high.
BRR: Beginning with the first point of your proposed nationwide policy of edible oil, why does Pakistan have such low levels of oil seed production given that imports are so high?
SA: This is why we need a national oil seed policy which accounts for all factors that are dis-incentivising indigenous oilseed production. For instance, one major factor is the support price of wheat. A commodity that is worth $240-250 is being provided a support price of $320. This system causes inefficiencies and losses. When Pakistan exported it, a $180 subsidy had to be given though it's C&F (cost and freight) value was $200. This is a highly inefficient system. We propose to take at least 30 percent areas under wheat and give it for oil seed plantation.
Among oilseeds, farmers have had good experience with sunflower and rapeseed. In FY09, Pakistan produced about 800,000-900,000 tons of rapeseed and sunflower in Sindh and Punjab. But this year we have hardly had 200,000 tons of oilseeds mainly because of support prices of competing crops.
APSEA always announces oilseeds support price but we have to keep in mind imported edible oil prices. This is why there is the need for a holistic national oil seed policy that keeps all factors in mind.
BRR: Moving on to the second point of your nationwide policy of edible oil, can you explain value addition a bit more?
SA: Pakistan's oil and oilseeds import bill is touching $3.5 billion. Take palm oil for instance, we keep importing finished products such as RPB palm and RPB palm olein. We need to import crude palm oil.
We have signed PTA and FTA with Malaysia and Indonesia respectively which are heavily tilted in their favour. They have imposed export tax on their crude palm oil to discourage its exports and promote refined products exports. The price difference between imported value added products and raw material is not significant.
We import 3.0 million tons of refined palm oil. That is very big volume. We have sufficient installed capacity in our refineries to process crude oil but that capacity is not being utilised.
Problem also lies on our duty and tax structure because there is no appreciable difference between imports of crude oil versus refined products. Look at India for example, the difference in duty between crude palm oil and refined products is so significant that the bulk of their imports are of crude palm oil which are then refined locally.
This makes sense economically and from a health point of view as well. Because imported refined palm oil spends quite a long stretch of time in their supply and logistical pipelines, its condition deteriorates. Locally, some companies sell it in packed form without further processing which is detrimental to health. If it was processed locally, the quality would improve.
BRR: This brings us to health, the third point of your proposed policy. Do you support the ban by Punjab Food Authority on ghee due to presence of harmful trans-fat?
SA: The ban has been proposed from 2020 and it is a good effort on their part. The way it is being implemented however, leaves a lot to be desired. They seem to imply that banaspati ghee is harmful but actually, it is the process of partial hydrogenation which used to manufacture banaspati which is harmful. There are also healthy alternatives of producing banaspati that do not use the hydrogenation process.
The US Food and Drug Administration (FDA) have removed products using partial hydrogenation from its category of GRAS (Generally Regarded as Safe) substances. Partial hydrogenation cannot be used there for any food product.
Unfortunately, Punjab Food Authority has created confusion by banning all types of banaspati. Virtual Trans-Fat Free (VTF) Banaspati that has lower trans-fat should not be banned. There are several companies that make good quality VTF banaspati.
BRR: If you look at the LSM numbers of ghee and oil production, you can see a 7-10 percent decline in ghee production. Is this because of the Punjab Food Authority ban?
SA: The population in general wants to shift to cooking oil but the price of cooking oil is 15 to 20 percent higher than ghee. Due to movements in international market, when the gap between cooking oil and ghee diminishes, the sales of cooking oil increases. The health factor in our edible oil policy will also support cooking oil consumption and local oilseeds.
The consumer needs to be educated a little bit. Hydrogenation process that creates trans-fat only needs to take place to change the texture otherwise there is no need for it. This is why we say that remove price obstacles so that consumers graduate to cooking oils by themselves.
BRR: Which regulatory body or government body should be responsible for making the edible oil policy?
SA: Mainly, edible oil comes under Ministry of National Food Security and Research. We have talked to them several times. At one time, there was also a Pakistan Oilseed Development Board that has been abolished. Not a lot of progress has been made but we are taking it up with the new government. We are hopeful that they will be more receptive.
BRR: How big is the market for banaspati and oil in Pakistan and who are the main players?
SA: The market is about 4.1 million tons. The premium segment is about 10 percent of the total market with 5-6 major players. Many international brands are now taking interest in the Pakistani market. It's a growing segment characterized with high turnover and low margins. The market is growing by about 4 to 5 percent but it is quite saturated with limited product differentiation.
BRR: Let's talk about your company. Can you give us a history and background of your business?
SA: Shujabad Argo industries was set up in 2000. At that time, Malaysian palm oil dominated the domestic edible oil market while the local soft oils industry was just starting off. There was some local crop of sunflower seeds and rape seeds, but the bulk of oilseeds were imported, particularly canola seeds from Australia and Canada.
In 2000, we started the oilseed crushing unit at Port Qasim, and later doubled the capacity in 2002. Refining processes were added in 2005 when we started marketing packaged products such as cooking oil and banaspati ghee.
BRR: Shujabad Agro also supplies to other oil companies such as Dalda. Isn't that like supplying to your competitors?
SA: Our Company has two strategic business units. One unit takes care of the crushing side and the other looks towards our refining and packaging side. The crushing industry is growing very rapidly with the increased demand for soybean meal by the poultry industry. The biggest challenge faced by the crushing side is to handle price volatility caused by international market. To manage the risk and to cater to our volume of crushed seeds, we sell crude oil to other companies.
BRR: What types of oilseeds are used for manufacturing by your company?
SA: Mostly we use was canola, soybean and sunflower seeds. Oil seeds are crushed mainly for oil but soybean seeds are an exception because they are crushed for protein and used in poultry feed. Worldwide, corn and soybean are mixed to make poultry feed.
Feed conversation ratio (FCR) indicates the amount of feed that needs to be given to get one kilogram of live bird. Typically, the FCR here used to be 2.0 kg but with the introduction of soybean it has been reduced to 1.5 kg because of which the cost of poultry has come down significantly.
BRR: Can you explain why the FCR has gone down?
SA: Simply put, the formulation of feed has changed. Now more nutrition is packed and good digestible protein is balanced in the chicken diet. Previously, there was limited availability of soybean meal, so cheaper and less efficient substitutes were used.
In 2013, a multinational company started production here. They introduced soybean formulation which brought about remarkable changes. It led to awareness of the importance of soybean in poultry meal preparation.
BRR: Given the US China trade war and that China has implemented tariffs on one US imports of soybeans, how do you think it will affect the domestic market?
SA: The impact on the local market will be temporary. The US is about to harvest its soybean crops of 125 million tons. China purchases about 40 million tons of soybeans from the US; both need to trade soybeans to survive.
However, there is a huge export opportunity for Pakistan that is being missed. Because of the China US trade war, China is arranging to import meal from all over the world. Initially they allowed imports from five countries among which India is the only soybean producer. Obviously, the permission means indirect imports of soybean from the US that can then be processed into soybean meal and exported to China. Pakistan is already an importer of US soybeans but we are not on the list and this is a big missed opportunity for exports.
If we want to export soybean, we will first have to get approval from China and then Department of Plant Protection (DPP). In 2012, China revised its quarantine policies and asked all exporters to register. Pakistan has previously exported 200,000 tons but did not timely respond to the Chinese queries. The countries that had been banned by China were able to resume exports within months. On the other hand, it took us three years to have the ban lifted. We got the approval in 2017 after which we did not get permission from DPP to export rapeseed meal.
BRR: What kind of challenges have you faced when you import oil or oilseeds?
SA: There is fumigation requirement in Pakistan. Three million tons of oilseeds are imported in Pakistan and they require each vessel to be fumigated with methyl bromide. It is a very toxic chemical banned in many countries due to its environmental hazards.
Another issue we face is the limited infrastructure. More than 90 percent of the imported oilseeds are unloaded at Fauji Akbar Portia (FAP) terminal of Port Qasim. It has capacity of 1.5 million tons and our imports are in excess of 3 million tons. So the costs of waiting and demurrage are quite high - last year we must have given $4 - $5 million in demurrages. Fumigation adds to demurrage costs because it takes time to conduct. Bear in mind that each vessel costs $25,000 - $30,000 a day so each additional day adds to our costs and we are bleeding precious foreign exchange.
We have been trying for the last 3 to 4 years to use KPT facilities instead but it has no oilseed storage facility. FAP has facilities to unload cargo fast. If such silos were installed at KPT with oilseed storage facilities, it would help us a lot. We are paying high demurrages costs at FAP while berths are empty at KPT. It does not make sense. Gwadar is not an option because the freight cost would be too high.
APSEA has proposed that we can finance the construction of the required facility; we just need to have space assigned to us on lease the way it has been allotted to the cement exporters.
BRR: Any last words that you would like to add?
SA: What I would like to add regarding DPP issues, that we can understand that every country needs to put Sanitary and Phytosanitary measures in place for its agricultural imports, but these must be established and implemented with clarity. No business can survive in an environment of uncertainty. We have been tangled in the same issues for years but haven't been able to even engage into meaningful negotiations with the trading countries who are already trading the same commodities in much bigger volumes throughout the globe.