Indonesia’s blanket ban on palm oil exports puts Unilever in a pickle. As the world’s biggest buyer, spending €2.5bn last year, the UK-listed group is reliant on the oil for everything from soap to ice cream.
Much of that comes from Indonesia, which, together with Malaysia, is home to about 90 per cent of palm oil production. Implicit in an Indonesian export ban is scarcity of supply and increased prices for the rest of the world, on top of rampant foodstuffs inflation.
Unilever has some leeway. It has secured forward purchases. Optimists might count on rationality prevailing in Indonesia: stopping cargoes may temper domestic edible oil prices but this is a country that relies on those selfsame shipments for about 4.5 per cent of economic output. Domestic demand is a fraction of exports and there is only storage capacity for a month or so. Substitution means some imports — soyabeans, say — may become more expensive. Already there has been flip-flopping since the ban was announced last Friday.
Alas, palm oil is just 15 per cent of Unilever’s inflationary worries; prices are spiralling in the rest of its commodity basket too. The good news is, like peers, the maker of Knorr stock cubes and Dove shampoo is able to push much of these on to consumers. Pricing in the first quarter was up 8.3 per cent year on year, beating even Nestlé.
Still, those price rises cover just 68 per cent of the hit to Unilever, which is counting on another €2.7bn of input cost inflation in the second half. That explains guidance for full year underlying operating margins at the lower end of the previously forecast 16-17 per cent range.
Pushing more price rises on to consumers during a cost of living crisis is tough. Already, the biggest burden is being shouldered by emerging markets — more used to inflation and helped, in places such as Brazil, by commodity-boosted currencies. Latin America’s pricing, up 10 per cent in the first quarter, is double that of Europe. Yet European sales still stuttered: volumes fell 4.4 per cent, only partly a reflection of the Covid-inflated year-ago comparison. For Unilever, as for its peers, the difficulty is in sustaining an impressive first quarter.
