Wednesday, February 24, 2016

Palm Oil Scenario

Majyd Aziz

Human beings have been using palm oil since 3000 BC and, in fact, everyone consumes products that have palm oil component. Palm oil is considered the Common Man's Oil. Pakistan has become a major player in the global palm oil market since palm oil has a 71% share in the edible oil market. This is mainly due to low cost and high demand for hydrogenated oils (Banaspati) that has a share of 60% compared to cooking oil with share of 40%. Pakistan, being the fourth largest importer of palm oil, has become a hot competitive destination for major palm oil growing countries, Indonesia and Malaysia. These two ASEAN countries are the two dominant global suppliers overseeing four fifths of global production while responsible for nine tenths of world trade. Pakistani imports depict a marked preference for Indonesian palm oil, especially after Preferential Trade Agreement with Indonesia even though there is a Free Trade Agreement with Malaysia. The share of Indonesia in exports to Pakistan was 42%, 73% and 83% in 2013, 2014 and 2015 respectively, while of Malaysia was 58%, 28% and 17% in these three years.

The global production of palm oil is increasing at a brisk rate from 46.20 million metric tonnes (MMT) in 2010 to 62.40 MMT in 2015. The future projections are also positive, with experts predicting total production to touch the 90 MMT figure by 2025. The share of Indonesia in 2015 was 33 MMT while of Malaysia was a tad over 20 MMT. World palm oil exports increased sharply to nearly 48 million MMT in 2015, which depicts its huge demand. India imported 9.5 MMT while Pakistan bought 2.5 MMT. Pakistan's import of palm oil consists of Olien, Refined Bleached Deodorized Palm Oil (RBDPO), and Crude Palm Oil (CPO). Due to a limited refining base, Pakistan only imported 104,000 metric tonnes of Crude Palm Oil. Pakistan’s palm oil imports declined to $1.8 billion in Fiscal Year 2015 from $1.9 billion in the preceding year, mainly because of softening palm oil prices internationally. Although the prognosis is that Pakistan's palm oil demand would remain steady in the next few years, major players like prominent businessman Najib Balagamwala are convinced that a shift towards soybean oil would reduce the overall demand of palm oil.

At present, in Pakistan, the duty structure for palm oil products is as follows:
Palm Oil Duty Structure : Pak Rupees / Metric Tonnes
Palm Oil
Federal Excise

World experts and officials promote their own views and opinions on the present and future of the palm oil sector. Thomas Mielke of Oil World, Germany, a leading private authority on oilseeds, oil and meals, has a bearish outlook for palm oil prices in 2016. According to him, with prices of global commodities plummeting due to economic slowdown, geo-political risks, financial uncertainties, dwindling prices in the world equities market, weather dryness caused by El Niño resulting in crop damage, weak global energy prices, a slowdown in the Chinese economy, and a shift towards soybeans, the price of palm oil products would remain under pressure. Dorab Mistry, Director of Godrej International of India, also agrees on the effects of El Niño on crop production. He terms it as a "triple whammy of dry weather, biological low cycle, and seasonal low period". He also maintains that a huge demand for soybeans by China that could be as high as 84 MMT would also negatively influence overall palm oil demand.

Kanya Lakshmi Sidarta of Indonesian Palm Oil Association states that, "Indonesian palm oil is now trending towards a more diversified downstream product, contributing a significant 13% share of total export earnings". She further added, "palm oil results in stabilization of food prices and is an important source for renewable energy. Palm oil is considered to be the most competitive feedstock for sustainable biodiesel". The Indonesian government has mandated the use of palm oil to produce biodiesel for domestic needs. At present, over two MMT per year has been diverted towards producing bio-fuels. Paulus Tjakrawan of Indonesia Biofuels Producer Association estimated that bio-fuels demand in Indonesia would rise from 5.50 MMT in 2015 to nearly 8.0 MMT in 2016 and projections are that it would reach 24 MMT by 2025. According to him, the share of bio-fuels in producing energy is 20% in transportation, in industry, and in SME, agriculture, and fisheries sectors while it is 30% in power generation.

Notwithstanding the estimates of Mr Tjakrawan regarding increased diversification of palm oil to produce bio-fuels, Mr Mistry sees a Catch-22 situation. He cautioned that, "the main determinant of the success or otherwise of the biodiesel mandate will be the price of Gas Oil or Mineral Diesel in South East Asia. If the price of Gas Oil remains low around US$ 450 per MT and the local domestic price of CPO in Indonesia (without Export Tax ) rises to US$ 500, then it will require a subsidy of US$ 160 per MT to make biodiesel workable. If the price of CPO rises to US$ 550, the subsidy required would be a massive US$ 210 per MT. That will reduce the tonnage of biodiesel that can be subsidized and therefore consumed. So it can be said that the biodiesel program has an in-built bias towards the price of mineral diesel and also has a self-correcting mechanism."

The foreseeable global position is that palm oil, although universally accepted as a much-desired commodity, would be susceptible to many extenuating circumstances. The production can only be increased through allocation of more cultivable land in Indonesia and Malaysia, especially if they have to maintain their strong global presence. At the same time, major importing countries, like Pakistan, would hedge their bets and rely more on alternate crops, such as soybeans. A strong indication is that imports of soybeans that were about 9,000 MT in 2014 shot up to 580,000 MT in 2015 despite increased imports of palm oil products. It is now imperative that the Pakistan Vanaspati Manufacturers Association, All Pakistan Solvent Extractors Association, Pakistan Edible Oil Refiners Association, and relevant indentors, importers and facilitators, agree on a joint harmonious and institutionalized approach, so that not only government policies are rationalized for promotion of the edible oil industry, but also to promote a favorable, efficient and formidable position of Pakistan as a major global player. 

Reliance on imported Edible Oil

Majyd Aziz

PAKISTAN is primarily an agriculture country. However, the agriculture mix is heavily based on cotton, wheat, maize, rice, and sugar. Notwithstanding the importance of these crops in the farmland, the unwillingness of agriculturists to branch out to other crops is blatantly evident. Pakistani farmers are not keen to forcefully address edible oil crops despite the growing demand for these products. Hence, Pakistan depends on huge imports to cater to the local needs.

The reluctance to develop a strong base to grow rapeseed, canola, and sunflower is basically due to considerations of profits, but it has also to do with bare utilization of modern farming practices. The farmers are comfortable with the traditional crops and would prefer to grow pulses rather than, for example, sunflower. This is evident from the statistics provided by Pakistan Oilseed Development Board for the last three years. The production of rapeseed for 2012-13, 2013-14, and 2014-15 was 216,000, 189,000, and 181,000 tons while the rapeseed oil produced was 66,000, 60,000, and 58,000 tons. The canola production of oilseed and oil has remained stagnant at 16,000 tons and 6,000 tons respectively. The production of sunflower oilseed during the above period was 244,000, 190,000, and 178,000 tons while oil produced was 95,000, 76,000, and 68,000 tons.

The above figures reflect the missed opportunities of crop diversification, demonstrate a massive dependence on imports, and reveal the inability of the policymakers to pro-actively support the farming community and convince them to grow these crops. The bureaucratic mindset to take the easy way out and rely on fast-track imports is never a prudent policy. The volatile global marketplace, the vagaries of climate, especially El Niño, the currency factor, and the inland transportation freight are factors that impact on the overall cost of imports.

The imports of rapeseed, canola, sunflower, and soybean seed is worth considering. Rapeseed/canola imports for 2013, 2014 and 2015 on basis of arrival were 534,384, 982,870, and 806,766 metric tonnes while imports of sunflower seeds went up from 185,985 to 193,186 metric tonnes and then drastically dropped to only 30,486 metric tonnes in 2015. However, soybean seeds imports commenced in 2014 with a negligible import of only 9,094 metric tonnes but shot up to 579,724 metric tonnes in 2015. This exhibits a strong preference for soybean by the solvent extractors in Pakistan.

The prime reason for the upsurge in soybean imports was the shift from rapeseed/canola to soybean. Najib Balagamwala, who spearheaded the imports and facilitation of soybean seeds, stated, "24 solvent plants shifted from canola because it had reached a saturation point resulting in negative profit margins from crushing. Today, the position is that Pakistani importers have contracted around 1.45 million metric tonnes of soybean. Of course, this shift led to a shortage of canola oil and sunflower oil as nearly 45% of the mills crushed only soybean seeds."

Rasheed Janmuhammad, a big name in edible oil, said, "there has been substantial increase in oilseeds into Pakistan every year, that is, 62.4% in 2014 compared to 2013 and 19.56% in 2015 compared to 2014". He added that "2015 has been the first year that Pakistan has embarked very aggressively on the journey of importing soybean due to quite weak global prices and the duty advantage over other oilseeds. This shift of buying soybean will ultimately reduce the import of other oilseeds like canola, rapeseed, and sunflower." He further disclosed, "the huge crop of edible oil and oilseeds all over the world has made the sellers do aggressive marketing and thus there is a glut of edible oils at the consumption stage. The case of Pakistan is worth considering. Domestic entrepreneurs have covered a reasonable quantity of soybeans during 2015 and sufficient coverage for their requirements for the first six months of 2015." Najib Balagamwala echoed this statement and said that over 32 Pakistani entrepreneurs visited Romania and Australia to study the oilseed business and firm up future deals.

Shakil Ashfaq, Vice Chairman, All Pakistan Solvent Extractors Association, lamented that "the growth of local crops has been disappointing, with less than 15% of the total edible oil demand being currently met through domestically produced oilseeds". He reasoned, "the support price for wheat being maintained by government is too high compared to international market and this has hampered the growth of oilseeds crops". He also added that "Pakistan is the 11th largest poultry producer in the world, with a production exceeding 8 million metric tonnes of poultry feed. With the recent trend among feed millers to increase soybean in the formulation, the demand for soybean is rising rapidly. However, the current inclusion rate for soybean meal in poultry feed is about 12% which is fairly low. Given that poultry is growing steadily at rate of 8%, there is a great potential for growth in crushing of soybeans."

The annual per capita consumption of edible oil in Pakistan is only 17 kg with total consumption around 3.70 million metric tonnes. Pakistan produces between 0.50-0.70 million metric tonnes and thus 2.60 million metric tonnes are imported. The total import bill for edible oil is about $ 2 billion while the imports of oilseeds are approximately $ 0.50-0.60 billion. Pakistan has emerged as a major global player in edible oil market. The production of soybeans in the world has increased much faster than that of other oilseeds. At the same time, the trend towards utilizing soybean in Pakistan would ensure ample supplies of imported soybeans, and it is predicted that this would ensure continuity and attractive prices. Najib Balagamwala estimated that he foresees imports of 2 million metric tonnes of soybean and 1 million metric tonnes of canola, rapeseed and sunflower, mainly due to industry stability and duty protection for the solvent extractors and oil mills.

It can be rightly said that the local farmer is not eager to switch to canola, rapeseed, or sunflower due to production and cost viability. Thus, dependence on imported soybean augurs well for the local solvent extractors. At present, the import duty is 2%, the Federal Excise Duty is Rs 400 per metric tonnes, sales tax is 6%, and advance income tax is 5.5%. It is proposed that these front-loading duties and taxes must be zero-based so that the consumers get the finished product at favorable rates and, at the same time, Pakistan would be in a position to export to neighboring countries. A cost-effective and efficient supply chain would be the ensuing result. Pakistan has the potential and expertise to excel and further develop the edible oil industry. 

Friday, January 8, 2016

Rangers provide comfort zone in Karachi

Majyd Aziz

Karachi Chamber of Commerce and Industry led the vociferous chorus for continued deployment of Sindh Rangers in the metropolis. The worsening law and order scenario in Karachi had reached a crescendo, prompting the representative body of 21,000 direct and another 30,000 indirect members to demand immediate deployment of the Army to usher in sanity.

Although the Rangers were conspicuous by their presence in the city, they had a limited mandate and not authorized to tackle instances of dacoities, extortion, or kidnapping for ransom. Trade and industry became every day victims. When matters reached the boiling point, KCCI issued the final ultimatum. Enough is enough. Give widespread powers to Rangers. Cleanse the city of the menace of desperadoes. KCCI leadership had always expressed deep concern over politicizing of Sindh Police since most of recruitments were being done on political grounds, a prime reason for the ongoing lawlessness. Police must be de-politicized on priority basis, because the Police hierarchy was subservient to the political forces much to the chagrin of the citizens. Nazim Haji, a former Chief of Citizen Police Liaison Committee, very harshly commented, "The Rangers have done an excellent job so far in spite of coordinating with a Police force led by a corrupt and incompetent Sindh IGP".

In October 2014, Maj Gen Bilal Akbar, DG Sindh Rangers, visited KCCI and had a closed-door session with the members. After listening to a litany of complaints, he assured them that Rangers officials were working round-the-clock to share the grievances and risks suffered by Karachi citizens with special focus on creating a secure business environment. He highlighted the action plan to improve the law and order situation.

On May 16, 2015, we, the Alumni of National Security Workshops of National Defence University, Islamabad, organized "National Seminar on Peace, Security & Governance in Karachi" where Karachi Corps Commander Lt. General Naveed Mukhtar was the Chief Guest. In a highly quoted and much discussed speech, he identified the parallel power centers in the city as obstacles for law and order. He stressed on the need for operational and professional independence of local administration, particularly, Karachi Police, in order to achieve peace and stability. He said Karachi was targeted to disrupt Pakistan's international trade and economic engine since the city accounted for 65% of Pakistan's revenue. He made it clear that the targeted operation would continue until its logical conclusion. His address was a morale booster for trade and industry and helped restore confidence.

A couple of weeks later, Maj Gen Bilal Akbar revealed the astonishing news that Rs 230 billion was the annual illegal collection in Karachi. This was done through extortion, kidnapping for ransom, distribution of water, sale of snatched hides of sacrificial animals, illegal marriage halls, and other criminal activities. He disclosed that, "a systematic and regular distribution is in place for these amounts to reach certain influential people". What was disturbing was that huge amounts from these collections were used to procure illegal arms and ammunition.

It was with shock and consternation that the business community found out that the Sindh government was playing politics in the case of renewal of the Ranger's tenure. The Sindh government's stand was that Rangers exceeded their mandate by hitting on corruption cases. Its fury was in response to the high profile arrest and incarceration of a close confidant of PPP Co-Chairman. The business community, on the other hand, applauded the publicized action of Rangers but expressed disapproval and contempt at the escape from the country of those who were branded in media as very corrupt. There were whispers in markets of secret deals enabling the corrupt to flee.  The leaders of seven Town Associations, representing all industrial estates, and some trade Associations organized a protest at Karachi Press Club to demand extension of the mandate. They warned that playing politics would incur the wrath of industrialists and their workers. The next day, the mandate was renewed. At an informal meeting, one trader even demanded that Karachi should be separated from Sindh. Surprisingly, there were no arguments against this by others.

The law and order situation in Karachi improved due to the ubiquitous presence of Rangers and the many raids made daily. Lyari was transformed from a war zone into a safer place of residence and for commerce. The focus of Rangers was to rid the area from the menacing and dangerous Lyari Gang War. Moreover, those pockets that had become strongholds of Taliban were freed from their influence. Militant wings of political parties were contained largely while most of the extortionists went underground.

Junaid Makda, President SITE Association of Industry, the largest industrial estate in Pakistan, disclosed, "I am in constant communication with law enforcing agencies and I convey to them the concerns of industrialists. Rangers have now become an integral part of the SITE landscape. There has been a substantial decrease in crimes in SITE. Recently, when Sindh government was hesitating to renew the Rangers tenure in Karachi, we saw an increase in mobile snatching and looting of wages of workers. However, since last couple of weeks there is peace and security due to presence of Rangers".

There has been a marked slowdown in going after the corrupt since the arrest of Dr Asim Hussain. The business community feels that the tough statements emanating out of the Sindh government have resulted in Rangers losing the momentum in arresting corrupt politicians and bureaucrats. A vocal exporter, Shabir Ahmed, Chairman of Pakistan Bedwear Exporters Association, remarked that "Those of us who are primarily involved in exports have to face a barrage of questions from our foreign buyers regarding the petty politics of Sindh government in trying to hinder the excellent operation conducted by Rangers. They are amazed that a civilian government was impeding the process of improving law and order in Karachi just to protect known corrupt people. This is unheard of in any civilized society. It is shameful".

Notwithstanding this anxiety, people who have an ear in the right circles keep reassuring business leaders that there has been no receding from the action plan, and criminals, terrorists, and corrupt would be nabbed despite any political pressures.

The law and order improvement in Karachi can be gauged from certain revealing statistics comparing 2015 with 2013. Car snatching down 71% from 1128 to 329 while car thefts reduced by nearly 54% from 3841 to 1775. Target killings went down 27% to 153 from 209 while other killings went down 69% from 2789 to 874. Extortion cases reduced by 60% from 533 to 210 while kidnapping for ransom went down 58% from 85 to 36. The only blot was motorcycle-snatching statistics. These went up from 16583 to 17551, an increase of 6%.  

Poor economy and bad governance put together would always result in excessive crime, in high unemployment, and in dissatisfaction. The deteriorating law and order situation in Karachi was mostly due to these factors. The economy is improving, law and order is much better, but bad governance is still critically prevalent in the Sindh government. The Rangers are striving to play a prominent role in introducing good governance. The ball is now in the court of Chief Minister Qaim Ali Shah. He has to decide between peace and mayhem in Karachi, the vibrant soul of Pakistan.

Wednesday, December 30, 2015

Birthday Diplomacy in Raiwind

Majyd Aziz

A Pakistani business leader pens his thoughts on Modi's stopover in Lahore

Bus diplomacy. Cricket diplomacy. Handshake diplomacy. Now, Birthday diplomacy. India and Pakistan excel in unpredictability and abnormality. Sometimes, they are so hostile that their leadership refuses a handshake, whereas sometimes they go for the bear hug. India and Pakistan leaders have strange ways to project to the world that when they so desire, they meet and create the desired hype to display sparkling lights of optimism. Although the hoopla created by these initiatives does not last long, but for whatever it is worth, it surely generates the excitement and hope that are blatantly missing factors in the bilateral relations of the two neighbors. 

December 25 is a day of solemn reflection of the ideals and teachings of Muhammad Ali Jinnah, the Founder of Pakistan. His birth anniversary falls on Christmas Day, when most of the citizens felicitate their Christian fellow citizens. It just happens to be the birthday of Pakistani Prime Minister, Muhammad Nawaz Sharif. For his political party members, this is a three-event celebration day.

The TV channels were keeping the viewers occupied with programs on Jinnah and Christmas. Panelists on TV talk shows were motivating the viewers through the deeds and words of the Quaid. Then came the breaking news. More of a bombshell. Prime Minister of India, Shri Narendra Modi, was about to make a pit stop in Lahore on way home from Kabul. Why? To convey his best wishes and felicitation to Sharif on his birthday as well as on the nuptials of his granddaughter. Personal diplomacy at its best. Why? Is the ice melting? Climate Change meeting in Paris, National Security Advisors meeting in Bangkok, Heart of Asia meeting in Islamabad, and now Modi visiting Lahore/Raiwind for a birthday/wedding bash? All of a sudden, it is Zip-a-Dee-Doo-Dah in Indo-Pak bilateral scenario. It cannot be better than that. 

Hold on, say the critics. Not so fast. Modi while leaving Afghanistan aboard IFC-52 of the Indian Air Force with IFC-54 as the second security decoy, made a rough and tough blame of cross border terrorism on Pakistan even while Sharif was on his way to the airport to receive Modi with all smiles. Where were both NSA? Where was the media? What was the agenda? Kashmir, Siachen, MFN, Afghanistan, Terrorism, border conflict, cricket series, etc? Were all these ignored and only pleasantries exchanged while partaking cashew, almond, and pistachio nuts and tea? Sharif was the perfect host by keeping contentious issues away from the festivities of the day. In true traditional manner, he welcomed a neighbor, albeit a foe, he accorded all protocol, the neighbor being a Prime Minister, he accepted the felicitation and good wishes, as it should be done. So why the carping and ranting and raving by critics on both sides of the Line of Control?

Two categories of people had their day spoiled with black clouds on them. The fundamentalists belonging to the politico-religious parties and the retired uniformed personnel. The less said about the fundamentalists who just cannot fathom peace in the region. The retired officers of the Armed Forces in India and Pakistan, having nothing to do, no golf to play, living comfortably on pension and investments, spend their evenings on TV talk shows. They become expert analysts and commentators and they usually see a red handkerchief in all issues and initiatives taken to normalize bilateral relations and usher in peace in the region. They went all over like a raging bull. They knew that this small step by Modi might turn out to be a giant leap for the denizens of the sub-continent. 

The Indian opposition to the China Pakistan Economic Corridor, the Indian involvement in Balochistan, the incessant blame game played by Delhi accusing Pakistan of terrorist activities, the Non-Tariff Trade Barriers that India uses to hamper Pakistani goods to have a level playing field, and not allowing Pakistan and Indian cricket teams to play, are some of the genuine complaints of those who are vehemently and vociferously against any progress in the tense bilateral relations. 

Leave aside the conspiracy theories. Forget who initiated the Birthday Diplomacy. Ignore presence of External Affairs Minister Sushma Swaraj at Heart of Asia in Islamabad. Disregard belligerent outbursts of so-called analysts. Think positive. This was no selling out by anyone nor was it a Composite Dialogue. It was a much desired goodwill gesture by both the leaders. For crying out loud, even an estranged paternal aunt shows up at weddings. 

Industrialists and traders were in a bullish mood. Sajjan Jindal, the Indian steel tycoon, became the role model overnight. What Godrej or Ambani in India or Mian Mansha and S M Muneer in Pakistan did not have the critical mass to play a game changing role, Jindal did it, (or so they say). The naysayers alleged that the "steel" connection enabled the tycoon to be the go-between. So what? Jindal did it (or so they say). Barkha Dutt revealed that Jindal got both leaders in his hotel room during the SAARC Summit in Kathmandu in 2014 for 60 minutes of tête-à-tête (so she says). While FPCCI, FICCI, or SAARC CCI just talked and issued position papers and resolutions, Jindal did it (or so they say). 

Trade and industry leaders are sanguine that the trade normalization process would pick up momentum, the visa regime would again move towards liberalization, and maybe, just maybe, banks would be allowed to set up branches across the border. Munabao-Khokhrapar route may be allowed to function. Special Economic Zones at the border is also a distinct possibility. The consensus among businessmen is that although India should not be allowed transit passage to Afghanistan, many are open to the idea of India using Gwadar Port and the China Pakistan Economic Corridor to access Afghanistan. 

What next? For one, the Foreign Secretaries are meeting to resume dialogue on January 15. This is what is so imperative. Dialogue must not stop at all cost. No excuses, no hard posture, no back-pedaling. The future of the sub-continent and the region is stake. Michael Kugelman of the Woodrow Wilson Center in Washington in his Tweet summed it up fabulously. He said "Many winners from Modi in Lahore. One of them, quite frankly, is the civilian leadership, and democracy overall, in Pakistan." 

Naturally, every event attracts jokes, cartoons, and humorous tit-bits. The latest joke doing the rounds is worth mentioning. MNS: "What do you say, shall we talk about Kashmir? NM: "Why not" MNS: "Waiter, bring two cups of Kashmiri Chai, pronto."