Plantations sector

India has raised the import duty on crude and refined edible oils by 5% in a bid to protect farmers’ interest and provide a level-playing field to domestic oilseed processors. Duty on crude edible oil has been increased from 7.5% to 12.5% and on refined edible oil from 15% to 20%.

This move is not entirely a surprise to us as the players have been lobbying for a higher import duty on edible oils for some time. But the increase in duties was much lower than industry’s proposals.

It was reported that The Solvent Extractors’ Association of India has sought an increase in crude edible oil to 25% and refined oil to 45%. The Solvent Processors’ Association has asked the government to raise import duties on crude and refined edible oils by another 30%.

We view this as a slight plus for crude palm oil (CPO) producers due to the smaller-than-expected rise in import duties. The 5% rise in local edible oil prices due to the hike can be offset by the 22% fall in CPO prices over the past year, leading to a minimal price impact on consumers. We expect India’s appetite for palm oil to be unaffected by this decision.

India’s edible oils import rose by 27% year-on-year (y-o-y) from Nov 14 to July 15 due to lower selling prices for imported edible oils. This has also led to a 30% jump in stocks of edible oils at India’s ports and pipelines. Following this news, we do not discount the potential short-term destocking of edible oils by traders in India in the local market.

Indian palm oil refiners’ spread advantage between CPO and refined products due to the import duties differential is intact at 7.7%. Thus, they remain more competitive than Malaysian and Indonesian refiners, which have a lower refining spread advantage — 0% for Malaysia and 4% for Indonesia — due to the less favourable export tax structure for palm oil products.

We expect this news to have a relatively muted impact on CPO prices as we are of the view that the higher import duties for edible oils in India will not reduce demand for palm oil in the country significantly. As such, we are sticking to our average CPO price forecast of RM2,230 per tonne for 2015. — CIMB Research, Sept 21

This article first appeared in The Edge Financial Daily, on September 22, 2015.