HOW CLIMATE CRISIS CLOUDS FMCG’S REVIVAL
From West Africa to Southeast Asia, climate change is brewing fresh trouble for India’s embattled FMCG industry
biofuel mixing policies in Indonesia and Malaysia.
Palm oil prices have firmed up around 10% from February-end and the nearterm outlook remains challenging.
“Global palm oil prices are expected to average higher in 2024 compared to 2023, according to an S&P Global industry poll we conducted in January. The market sentiment remains the same currently,” S&P Global Commodity Insights, a commodities research and analytics firm, said in response to a questionnaire from Mint.
Crude palm oil futures contract on Malaysia’s commodity exchange—which influence global palm oil and vegetable oil markets—is expected to average at Malaysian Ringgit (MR) 4,000/mt ($845.12/mt) in 2024, compared to the average price of MR 3,799/mt in 2023, it said.
“From our observation and interaction with industry experts, factors such as stagnating output at main producers Indonesia and Malaysia, robust food demand and palm oil’s rising use in making biodiesel are expected to squeeze supplies in 2024,” it added.
BITTER HARVEST
If you think it is only the mid- and smallcap stocks which have been on a tear recently, buckle up for a bitter-sweet ride through the lush jungles of Western Africa. Prices of cocoa, the main ingredient for making chocolate, have tripled year-on-year. On 26 March, futures for May delivery breached the $10,000 per tonne mark for the first time ever, a headspinning episode in financial history which made cocoa beans pricier than the bellwether industrial metal copper (at around $8,500/tonne).
Cocoa has more than doubled in the first three months of this year, eclipsing the returns of superstar stocks like Nvidia and sending shares of chocolate makers plunging across the world.
Fluctuating weather coupled with crop pests have taken a toll on cocoa production in West Africa, which accounts for around 70% of the total global output of about 5 million tonnes. The two largest producers are Côte d’Ivoire and Ghana.
These two nations were battered by heavy rain and extreme heat recently.
In its quarterly bulletin of cocoa statistics published recently, the International Cocoa Organization (ICCO) projected an 11% drop in global cocoa output this year, mainly due to the after-effects
of extreme weather.
“Significant declines in production are expected from the top producing countries as they are envisaged to feel the detrimental effect of unfavourable weather conditions and diseases. Moreover, old trees in these countries are producing with lower yields,” the industry body said.
Just like oil palm, cocoa requires favourable climatic conditions at every stage of growth. Its yield is more impacted by precipitation than any other climate variable.
Late last year, heavy rains pummelled the cocoa crop in Côte d’Ivoire and Ghana. Total precipitation was more than double the 30-year average for the time of year.
Adding to the woes, the wet conditions gave rise to black pod disease, causing the plants to rot.
However, no sooner had the farmers come to grips with the calamity, another misfortune followed in February 2024 in the form of droughts typical of El Niño. This once again decimated yields as cocoa is highly sensitive to saturation levels.
In line with the conventional pattern in climate change-induced weather anomalies, farmers went from overabundance of water to a situation of scarcity in just a couple of months.
FMCG OUTLOOK
In contrast to the wild weather swings in some parts of the world, the condition of Indian FMCG investors has been uniformly morose.
Nifty FMCG was among the worst performing sectoral indices in 2023-24, rising 20% compared to the benchmark Nifty’s 28% gains. Its performance looks even more piteous when compared to the fiscal year’s stars like Nifty Realty (up 133%), PSU Bank (93%) and Auto (77%).
The FMCG sector is currently grappling with anemic volume growth on the back of elevated inflation and weak consumer sentiment, particularly in rural markets. The sector’s volume growth in the third quarter slipped to 6.4% from 8.6% in the previous quarter, while on an absolute basis it has remained the same for the past three quarters.
“High inflation in the past two years greatly impacted mass segment consumption, particularly FMCG products in rural areas. Slow income growth and high inflation reduced the desire to consume,” domestic brokerage house Motilal Oswal said in a report last week.
However, the companies managed to post healthy results in the previous quarter ended December 2023 as cooling input costs gave a fillip to their gross margins. But with prices of key raw materials like palm oil and cocoa on the upswing, analysts anticipate fresh challenges for the FMCG pack.
“After cooling off in the past few quarters, raw material prices have turned inflationary. As raw material prices deflated, companies had largely retained the benefits. Considering the competitive intensity, pressure on volumes and strong gross margins, we think companies would be reluctant to hike prices in the near term,” global investment bank BNP Paribas stated in a report dated 22 March.
It sees the increase in raw material prices in the current demand environment as a negative development for the sector.
“Crude, palm oil, LAB (Linear alkylbenzene) and coffee prices rose q-q and y-y, while mentha and tea prices rose q-q but are still lower y-y. This poses a risk to consensus’ margin assumptions. Specifically, increase in prices of cocoa (which have tripled y-y), coffee and sugar poses a risk to Nestle India’s margins,” it added.
The input cost trend is mixed for India’s biggest FMCG firm Hindustan Unilever.
“The company’s commodity basket has seen a mixed bag of price fluctuation. Prices of palm oil and palm fatty acid, crucial inputs for the company, increased QoQ. Additionally, tea prices fell substantially, while coffee prices increased. Furthermore, the company has decreased prices to compete with smaller and regional players,” Motilal Oswal added.
But overall, the Street’s near-term view on the sector remains bearish.
“We expect a weak 4QFY24 for FMCG companies. Pricing contribution is likely to be mostly neutral to negative, while we do not expect any major recovery in volumes. Higher raw material cost is a new headwind and pose a further downside risk to consensus earnings estimates,” BNP Paribas stated.