KUALA LUMPUR (Feb 3): India’s move to raise the effective import duty on crude palm oil (CPO) by 5.5 percentage points to 35.75%, effective Feb 1, 2021, is expected to weigh on palm oil demand.
CGS-CIMB analyst Ivy Ng Lee Fang said in a note today that the move is negative as it will reduce CPO price competitiveness against other edible oils in India, while higher duties will result in higher cooking oil prices.
“We estimate the revision will reduce CPO’s advantage in terms of the duty gap against other competing edible oils like crude soybean oil from 8.25 percentage points to only 2.75 percentage points,” she said.
According to Ng, India cut the import duty on CPO from 27.5% to 15%, effective Feb 1, 2021 (Monday) in its 2021 budget.
It also lowered the import duty on crude soybean oil and crude sunflower oil from 35% to 15%.
However, the government announced the imposition of a new 17.5% agriculture infrastructure and development (AID) cess on palm oil, and a 20% AID cess on soybean oil and sunflower oil.
On an overall basis, she estimated the revision to result in the effective import duty on CPO rising to 35.75% from 30.25%.
However, there was no change to the effective import duty on crude soybean oil and crude sunflower oil, which remained at 38.5%, she added.
“To put things in perspective, the reference CPO price used to calculate the import duty in India was set at US$1,049 (RM4,246.88) per tonne with effect from Jan 15, 2021. The increase in the effective import duty implies additional tax of around US$57.7 per tonne, which is likely to be passed on to consumers,” she said.
Ng said the higher effective import duty on CPO will raise cooking oil prices in India and could dampen demand for palm oil.
“This is near-term negative for CPO prices as India was the largest importer of palm oil in 2019, accounting for 19% of total palm oil imports,” she said.
According to Ng, after the introduction of the additional cess, the effective tax difference between CPO and refined palm olein had narrowed to 13.75% from 19.25% previously.
“This will be negative for India’s palm oil refining industry and could favour imports of processed palm oil over CPO into India in view of the high export levy and export tax currently imposed on CPO in Indonesia, which make Indonesian palm oil refiners more competitive,” she said.
Overall, she viewed the news as a slight negative for upstream plantation companies and Indian refiners but a slight positive for Malaysian/Indonesian refiners and Indian farmers due to plans to build domestic agriculture infrastructure with the cess.
She reiterated her “neutral” call on the sector.
Lam Jian Wyn
Source : The Edge Markets
