A series of duty hikes on edible oils since August 2017 and a sharper increase in import duty for refined palm oil will make palm oil more expensive in India.
Palm oil prices are expected to rise sharply in India, against the global trend. A series of duty hikes on edible oils since August 2017 (to support prices and crushing of domestic oilseeds) and a sharper increase in import duty for refined palm oil (a move aimed at improving refinery utilisation) will make palm oil more expensive in India. Considering all the duty hikes since August 2017 and the 10% social welfare cess, and considering these will remain unchanged through OY 2017-18, it is expected average palm oil prices in the domestic market will by 18% -20% year-on-year, said a Crisil study released on Thursday. According to Crisil, palm oil has a large share of consumption, mostly imported. Consumption of major edible oils in India stood at 22 million tonne (MT) in oil year (OY) 2016-17, i.e. November 2016 to October 2017, and was valued at `1.4 lakh crore. Domestic production met only 30% of that demand and the rest was imported. To promote domestic refining of palm oil, the government, in addition to the duty hikes, also raised the differential import duty between crude and refined palm oil. The differential, since August 2017, stands at 10% (11% since March 2018, including social welfare surcharge), up from 7.5% since 2014 and 5% since 2013.
Palm oil is the most consumed edible oil by volume in India, with a share of 40%, followed distantly by soybean and mustard oils. However, domestic production of palm oil is limited, and over 95% of the requirement is imported, mostly from the world’s top two producers – Indonesia and Malaysia. The palm oil imports constitute over 60% of the edible oil imports basket in the country, Crisil pointed out. “We expect palm oil’s domination of India’s edible oil consumption basket to continue in the medium term. Demand is supported by a price conscious domestic market, especially in the east, and the fact that palm oil is the cheapest of the lot. Besides, there is healthy offtake from the commercial segment (restaurants, hotels, food processing), which accounts for nearly 45% of total demand,” Crisil said further. On the global front, production of palm oil fruits in expected to increase 7% to 69 million tonne in OY 2017-18, over the 10% increase it saw in OY 2016-17, driven by Indonesia and Malaysia. International prices are consequently expected to soften by 5%. The 6-month futures quotes for crude palm oil (f.o.b. Malaysia/ Indonesia port) are trading lower than the average price for OY 2016-17. India being the largest importer of palm oil in the world, and a key trading partner for both Indonesia and Malaysia, lower imports resulting from duty increases could weigh further on international prices of palm oil in the near term. The Crisil note also stated: Domestic palm oil prices in the past typically moved in line with international prices as 98% of the oil was imported. A clear diverging trend is seen since the hiking of domestic duties.
An appreciating rupee, till January 2018, curbed the impact of the divergence to some extent. However, this trend has reversed since February. We expect rupee to continue to depreciate in coming months, but remain stable on average compared with OY 2016-17, putting pressure on domestic prices. The proportion of crude palm oil in overall palm imports is a function of the price differential in landed costs of refined and crude palm oil. This is significantly influenced by duty structure changes made by exporting and importing countries. Historically, whenever Indonesian and Malaysian governments have reduced export duties on refined palm oil, imports of refined palm oil have increased sharply in comparison to crude imports, as it was cheaper than importing and refining. Low export duties on refined palm oil impacted business models of players, who traded in refined oils, resulting in capacity utilisation of Indian palm oil refiners sinking to 35-40% by OY 2016-17. Despite the government’s measures in the past decade, the share of refined palm oil in total palm oil imports has risen steadily to 31% in OY 2015-16 and OY 2016-17. Even at a duty differential of 7.5%, edible oil sellers are finding it convenient to import refined palm oil directly. However, post the government’s move to increase the duty differential to 11% (including social welfare surcharge), the share of refined palm oil slipped to 18% of total palm oil imports in November and December 2018. Also, as a result of the recent measures promoting imports of crude palm oil as well as crude soya oil and sunflower oils over refined palm oil, we expect capacity utilisation of refiners to improve, Crisil said further.