Owing to its variety of end-uses, castor oil is one of the most sought after plant oils. But reduced production and fall in its global prices, have made it a tough commodity to make big profits out of through exports. The future appears encouraging though.
Neha Dewan | Novermber 2015 Issue | The Dollar Business
Centuries ago, the castor plant was revered because of its healing properties and referred to as “Palma Christe”, apparently because its leaves resembled the hand of Christ. Research suggests that castor oil was used for therapeutic purposes in ancient Egypt. The science and research on therapeutic value being sparse and the seed or bean being toxic to the human body in general, unless treated and labelled as edible, castor oil is used mostly for industrial purposes.
One Seed. Two Tales.
Castor seed (Ricinus Communis) is one of the major oilseeds cultivated in arid and semi-arid regions. According to experts, most suitable soils for castor cultivation are deep, moderately fertile, with slightly acidic conditions, well drained, and sandy loams. India, having the ideal conditions of cultivation, has been enjoying a virtual monopoly in this segment, as is evident from the fact that the country accounts for 75% of the total castor seed production of the world, followed by China and Brazil. In India, Gujarat is the major castor oil producing state accounting for approximately 75% of the total domestic production, followed by Rajasthan and Andhra Pradesh.
Castor oil of non-edible grade is renowned the world over as one of the most versatile of all oil types for industrial purposes. It’s used extensively in wide-ranging commercial segments including in the manufacturing of cosmetics, paints, synthetic resins, adhesives, brake fluids, lubricating greases among others. Some of the properties that make castor oil ideal for industrial purposes are its high specific gravity, thickness and hydroxyl value. This is perhaps the reason that the exports of the non-edible grade of castor oil has grown by about 12 times (by value) over the last decade, from $56.17 million in FY2006 to $703.81 million in FY2015. Exports of the edible grade, on the other hand, has nose-dived over the decade. There was a time, in FY2006, when India exported $134.69 million worth of the edible grade, which was more than double that of the non-edible grade, whereas in FY2015 the export value has dropped to a miniscule $0.16 million. The demand for the edible variant fell sharply in FY2009 and has been declining ever since. A big reason as industry participants claim for this fall is the availability of cheaper edible alternatives.
MONOPOLY BY DEFAULT
India, as the largest producer and exporter of castor oil in the world, is responsible for almost 83.65% of total global exports in this segment. Its main trading partners in this specific sector are China, Europe, Thailand and Japan. China has been one of the biggest growth drivers for castor oil due to its demand for sebacic acid (a basic industrial chemical compound) which is developed from this oil. China currently imports 30.67% of its total castor oil requirement, valued at $215.87 million, from India. However, despite these glorious numbers, India continues to be a price taker and not a price setter in the global castor oil market. One major reason being that India became the largest producer of the seed by default. Brazil, which in the 70s was the largest producer of castor seeds in the world, moved away from this seed to soyabean which has a higher yield and greater export demand for both its beans and oil. So did other major countries, leaving India with a virtual monopoly. Ironically, with synthetic substitutes being available at cheaper prices, India has not been able to leverage this monopoly.
"Although castor oil exports will rise this year, margins will remain low"
Veeresh Hiremath, Research Head – Commodities, Karvy Comtrade reasons that since the consumption within India is limited, the country depends on other countries to get buyers for castor oil. “More production is happening in India due to an increase in acreage and yield levels. Major importing countries, mainly industrialised nations, require more castor oil for their industries and they have the control over price. Hence, India has to obtain export prices to clear off its inventories,” says Hiremath.
Besides, a lack of adequate infrastructure and value additions are a couple of factors which are also responsible for making India a weak player on the price front. Experts suggest that this anomaly can be corrected if the industry expands the market by developing castor oil derivatives and invests in R&D. They unanimously believe, if the industry works as a more cohesive unit, India could soon be in a better situation. “India is the largest producer of castor oil and the entire world is dependent on it. By that logic, we should be the price setters easily. If this was the scenario in China, they would have been calling the shots. Here, we all cut corners and the entire industry is working against each other rather than as a whole. The situation could be addressed considerably if we were more united as an industry,” feels Samir Patel, Director – Exports at Shivam Agro Process, a Palanpur (Gujarat)-based manufacturer and exporter of castor oil. This is a sad situation to be in considering India’s monopoly in the trade.
Upping the Ante
In India, the planting season is typically during July or August and harvesting is done during the months of December or January. In the current Kharif season, castor seed has been sown in an area of 11.01 lakh hectares against 10.19 lakh hectares planted last year. “This acreage is above the five-year average acreage of 10.36 lakh hectares. This increment in sowing area, despite the erratic monsoon conditions, shows that the farming community in India still has huge aspirations from castor seed and its oil. It is highly expected that castor acreage will increase in future,” adds Hiremath.
Following the dip in export volumes last year, it is predicted that there would be an increase of 30% in castor oil exports in the current fiscal. Factors such as the rising demand from China, US and EU, as well as more stable prices this year, are helping in getting the numbers back on track. But does this increase in global demand in any way imply an impact on the domestic market? “There will be no impact on the domestic market since a very small proportion – only about 50,000 or 60,000 MT – i.e. less than 10% of total production, is used for domestic consumption. An average increase of 5% in demand is witnessed every year. If the castor oil prices are higher, people end up going for soybean oil as a substitute instead,” explains Patel.
Calling the shots?
The Solvent Extractors Association of India (SEA) forecasts that the Indian monopoly of Castor production in coming years could be challenged if some Brazilian companies succeed in their efforts to plant high-yielding beans on large tracts of lands in Brazil. On the price front, consuming markets are expected to remain well-stocked since a lot oil is lying repositioned and this will put a check on prices. The association points at the need for taking simple steps such as simplifying VAT refund to ease the financial strain on exporters, especially in the biggest castor oil producing state Gujarat. Other incentives to exporters such as those related to technology can also help to enhance the productivity. Investment by the government in R&D for better quality hybrid seeds, setting up of the necessary agri-infrastructure and imparting knowledge to improve the yield of the crop could boost castor seed production in the country. India is in a sweet spot when it comes to leadership in production. But given the near zero to negative margins in exports of the commodity at present, recommendation would be to revisit the idea after the next harvest. And ambitious though, but perhaps by then, India will have started calling the shots.
“There is no profitability to speak of”
TDB: Give us a brief overview of India’s castor oil exports. Could you elucidate the factors that have positioned India as the biggest producer and exporter of castor oil in the world?
Samir Patel (SP): India accounts for about 80% of castor oil production of the world. The climatic and environmental conditions for castor seed production are most apt in India. The castor crop requires temperatures ranging from about 7 to 35 degree celsius. It is a nine-month crop and is sown around July-August and harvesting commences around April. As castor seed prices in international market hardly fluctuate, the price-oriented farmers overseas are not so keen in its cultivation.
TDB: There are reports that suggest India’s castor oil exports are expected to rise 30% y-o-y in FY2016. Do you think this is a realistic expectation given the weak demand over the last few fiscals? If yes, how do you think this can be achieved?
SP: I would say, the demand is less and the supply is more at present. However, compared to the last year, the demand for castor oil has grown since the prices have been stable. Prices have been in the range of $1,200-$1,300 per metric tonne. For us also, exports have risen 13% this year vis-à-vis last year.
TDB: What kind of an impact would this demand have on the domestic market? Do yo see a price rise?
SP: There will be no impact on the domestic market since a very small proportion – only about 50,000 or 60,000 MT – is used for domestic consumption. An average increase of 5% in demand is witnessed every year. If castor oil prices are higher, people end up choosing soya oil as a substitute.
TDB: What makes castor oil so versatile as a plant oil?
SP: In the last 7-8 years, a lot of new derivatives have been developed from this industrial oil. Castor oil and its derivatives have varied applications in the manufacturing of biodegradable plastics, sebacic acid and soaps, making it quite versatile. Besides, it is also used in paints, cosmetics, lubricants, etc.
TDB: Can you gives us an idea of the margins involved in the castor oil-trade – from the farm to export markets? Which factors affect these margins?
SP: The industry works on negative margins! There is no profitability really to speak of. There are primarily seven to eight manufacturers in the trade who are mainly into exports, so that their import duty can be waived off. One has to keep the short or long position in mind as far as its trade is concerned.
TDB: Do you think there is a need to improvise existing government policies/incentives and/or introduce new ones to boost the exports?
SP: The incentives given by the government to boost exports is in turn taken up by the local manufacturers, and then passed on to foreign buyers in a bid to increase volumes. So, if the government can disclose the incentives at the end of the year rather than earlier, it can help boost exports of the product.
TDB: Do Indian exporters realise the potential of the product? Isn’t there a scope for further improvement?
SP: Indian manufacturers are not taking the complete benefit of castor oil exports, as India is the largest producer of castor seed. There are chances for improvement if all manufacturers stand united.
“Exporters have to obtain export prices to clear Their inventories”Veeresh Hiremath RESEARCH HEAD –COMMODITIES, KARVY COMTRADE
TDB: Which factors, according to you, have positioned India as the biggest producer and exporter of castor oil in the world?
Veeresh Hiremath (VH): India has emerged as the largest producer and exporter of castor oil in recent times. Exports of castor oil from India have seen an upward trend year-on-year, except in the last fiscal. In FY2015, India exported 4.59 lakh tonne of castor oil, which was less by 2.72% as compared to FY2014. Although the export quantity was lower, the earnings were higher due to the increased oil prices. During April-July 2015, India’s castor oil exports stood at 1.71 lakh tonne against 1.68 lakh tonne exported during the corresponding period last year. Increasing the area under castor cultivation, and thus increased castor production, has helped India become the biggest producer of castor oil in the world. Thanks to the efforts by the Indian government and industry bodies alike, to boost sales and exports, the country is also the largest exporter of castor oil.
TDB: India is the biggest exporter of castor oil, yet it obtains export prices that hardly reflect its near-monopoly. What accounts for this anomaly?
VH: Since the consumption of castor oil is limited in India, and more production is taking place due to an increase in acreage and yield levels, India is dependent on exports to generate revenues for the commodity. Major buyers for India’s castor oil are countries which require oil for their industries. So they have control over price. Hence, India has to obtain export prices to clear its inventories.
TDB: Data shows that prices of the non-edible variant of castor oil in the international markets have been falling over the last few years. What factors are responsible for this fall?
VH: The increased usage of castor oil substitutes has resulted in a decline in castor oil prices.
TDB: Do you expect acreage to increase for castor seed in the near future?
VH: In the current kharif season, castor seed has been sown in an area of 11.01 lakh hectares against 10.19 lakh hectares cultivated last year. This is higher than the 5-year average acreage of 10.36 lakh hectares. This improvement in sowing, despite the erratic monsoon conditions, reflects the sentiments of farming community that is hopeful of a good return. Moreover, with India being the single largest producer of castor oil – catering to the demand from all major industries – it is expected that castor acreage will increase in future.
TDB: What factors would you attribute to the bullish outlook for castor oil exports this fiscal?
VH: Rising demand for castor oil from China (despite their slowing economy) is causing the bullish outlook for India’s exports this fiscal. Moreover, castor seed production is going to be bumper in the current season, which signifies that India would export more castor oil.
TDB: Do you think there is a need to alter the existing government policies/incentives and/or introduce new ones to give impetus castor oil exports? What revisions do you recommend as far as export prices are concerned?
VH: Considering the limited castor oil consumption in the country and the present policy guidelines for its export, no revision of the policy is required. However, the government should encourage exporters by providing various incentives such as cash incentives to export more oil, and technology incentives to help enhance the productivity meet international standards.