Wednesday, February 8, 2023
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Money TalksTemporary fix to tame edible oil shortage chokes off refineries

Temporary fix to tame edible oil shortage chokes off refineries

When the largest edible oil refinery plants in Ethiopia were opened last year, officials assured the public that the shortage of edible oil would soon be a thing of the past. PhiBela and Shemu, both owned by private investors, were among  the factories tasked with meeting the total household demand of 75 million liters per month.

While Shemu is built to refine 950 tons of crude oil per day, PhiBela, owned by renowned investor Belayneh Kinde, has the potential to produce 1.5 million liters of edible oil daily. Had there been adequate inputs, the two would have produced surplus along with W.A., Al-Impex, and Hamaressa edible oil factories.

PhiBela was only using 24 percent of its overall capacity along with Shemu’s 30 percent. Reasons are the dismal in local production of oilseeds to crush, a lack of foreign currency to import crude edible oil, and the effects the war between Russia and Ukraine had on the supply chain.

Given that these issues are expected given the circumstances in the country and the change in the global market, it makes sense that neither the government nor the plants themselves have any control over them. What remained bizarre is this year’s situation.

Production remains low even while manufacturers are hoarding vast amounts of crude oil for refinement, and input prices, particularly for crude edible oil, have stabilized or even declined in the international market.

Shemu alone accumulated 5.6 million liters of oil in its warehouses to the point that it was unable to manufacture with better capacity due to distributors’ failure to convey the refined product to consumers through cooperative unions established in almost every village of the country. Similar, if not worse, difficulties are being faced by Phibela.

Last Wednesday, Belayneh Kindie Group, PhiBela Oil Factory’s parent company, announced that the factory would start distributing about 20 million liters of oil, which were indeed all in its warehouse. Refined palm oil accounts for 12 million liters of the stock, while sunflower’s share is 7.5 million liters.

What the management of the factories and officials at the Ministry of Trade and Regional Integration blame for this is the use of Franco Valuta. Since the government granted local businesses and Ethiopians living abroad Franco Valuta privilege to import basic food items in April 2021, imports of edible oil have flooded the market and reduced demand for refined oil.

The scheme was intended at substituting the companies which were handpicked by the government and satisfy over 90 percent of the country’s demand. When the refinery plants became operational, the government halted allocating foreign currency to the importers. But this has backfired and caused the price of edible oil to spike, prompting authorities to encourage importers to use Franco Valuta scheme to narrow the demand gap. Nonetheless, they had little knowledge of how the measure would affect the refineries.

Two weeks ago, the Parliament and top officials at the Trade Ministry were deliberating on the ministry’s performance during the first quarter and its plans for the fiscal year. The shortage of edible oil, which was a headache for officials and consumers last year, was on the agenda in the deliberations.

With pride in the measures his government took, coupled with a price decline in the international market, Teshale Belehu, state minister for Trade and Regional Integration, explained how the issue of edible oil is no longer a headache, at least for the moment. He had two main reasons for the market’s stabilization: Franco Valuta and the government’s allocation of foreign currencies to local factories for their input imports.

“Recently, the edible oil issue has not been of concern for these main reasons,” Teshale Belehu said in Parliament, before explaining how his office’s controlling mechanism and market decline aided the situation. The Ministry is in full charge of assigning distributors and ensuring the tradability of locally produced oil, as it has no market control over products imported using Franco Valuta.

The state minister mentioned in his response that the volume of sugar and edible oil imported through this scheme is way higher than what had been expected and is enough to stabilize the market. Some 28.6 million liters of palm oil alone were constantly imported by 113 importers with their own foreign currencies. Somalia Regional State stands tall with higher volume of imported oil, he explained.

“Because of the price decrease in the international market, what has been imported through the Franco Valuta and what the local producers sell have been almost the same in terms of price,” he said.

What the official implied but did not connect was how the refined edible oil imported via the Franco Valuta had affected local factories. Refineries are forced to cease operations since stock levels in the warehouses of the factories appear to be at an all-time high and the distributors aren’t loading the items from the factories.

The factories’ dire need for buyers was indeed recognized by the officials in Parliament, but the blame was put on the distributors assigned by the government. “It has to be recognized that the factories now have no distributors taking the oil from their warehouses. They have complained to the ministry that the unions aren’t willing to take the oil,” Teshale said.

For the state minister, the disinterest is caused by the smaller profit margins distributors receive in comparison to what they make from the products imported through Franco Valuta. The factories are legally prohibited from selling the oil to anyone other than distributors the government has assigned for them. The price is also determined by the government, and factories cannot even adjust prices if there is a change in the international market.

The 5.6 million liters of oil in Shemu’s warehouses were refined and packed for distribution last month, but distributors are not interested in supplying the output, according to Tesfamichael Guesh, the factory’s general manager.

“Price of the refined sunflower and other types of edible oil imported through Franco Valuta is almost the same with that of ours, on which we import the crude oil, refine here, and distribute,” he said. “The main thing is that the market is stabilized and consumers can now get edible oil easily.”

The factory gate price from Shemu is around 120 birr per liter for the 20 liters of packed oil. It was also the same amounts of cost distributors incur to distribute the refined oil at the factory of PhiBela, but the company announced last Wednesday that the 20 million liters are being distributed at a price range of 95 to 100 birr a liter.

“Previously, the distributors used to pick the oil from us immediately; even some had to be listed on a waiting list. It is the reverse now. We have to wait for them to pick for us as they prefer the Franco Valuta imported oil,” said Eniyew Wassie, general manager of the factory.

According to an official at the Trade Ministry, the decline in the price of edible oil products on the international market came after the refinery plants made sizable payments while the price of crude was high owing to international conditions.

Loosening the restriction is what the government is currently embarking on as the solution to the problem, according the official. “We are temporarily allowing the factories to sell the oil at market value (at a lower price) and wherever they find a market for,” the official explained. “This exemption will for sure give them relief and make them competitive in the market flooded by the product imported through Franco Valuta.”

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