India’s lower import duty on CPO positive for plantation companies

The reduction in effective import duties of 5.5% implies a reduction in import duties of around US$62.5/tonne, which is likely to be partially passed on to consumers


INDIA’S decision to lower its import duty on crude palm oil (CPO) from 15% to 10% is a positive development for crude palm oil exports and upstream plantation companies in Malaysia.

CGS-CIMB Securities Sdn Bhd analyst Ivy Ng and Nagulan Ravi stated the revised effective import duty for CPO of 30.25% which is 5.5 percentage points lower will enhance the CPO price advantage in terms of duty gap against other competing edible oils like soy oil from 2.75% to 8.25%.

“To put things in perspective, the reference CPO price used to calculate the import duties in India was set at US$1,136 (RM4,730) per tonne with effect from June 16, 2021.

“The reduction in effective import duties of 5.5% implies a reduction in import duties of around US$62.5/tonne, which is likely to be partially passed on to consumers,” they wrote in a recent report.

On June 27, India’s Ministry of Finance announced the new tax rate will be effective from June 30 to Sept 30, 2021.

This was the second time India revised its import duties this year. The first cut was made in February where it was reduced from 27.5% to 15%.

However, the government then announced the imposition of the new 17.5% agriculture infrastructure and development cess on palm oil.

“This latest move is aimed at lowering cooking oil prices in India in the short term as the revised lower import duties for CPO is only for a three-month period,” said the analysts.

India also announced import of RBD palm olein (a refined, bleached and deodorised form of palm oil) will be allowed without restrictions until the end of December 2021.

They noted it is positive for Malaysian palm oil refiners as India’s RBD palm olein imports from Malaysia had become negligible since the government disallowed refined palm oil imports without a special permit in January last year.

“The decision to allow imports of RBD palm olein without restrictions will be negative for the India palm oil refining industry and could favour imports of processed palm oil over CPO in view of the high export levy and export tax currently imposed on CPO in Indonesia as it makes Indonesia palm oil refiners more competitive,” they said.

Malaysian Palm Oil Board DG Dr Ahmad Parveez Ghulam Kadir had previously said with the CPO price level stabilising between RM3,500 and RM3,800/tonne, export of CPO to India is bound to increase in the near future with the reduction in import duty.

He cautioned stiff competition from Indonesia as the country would also benefit from the reduction.

Indonesia plans to cut its export levies on CPO to US$175/tonne from the current US$255/tonne when the CPO price exceeds US$1,000/tonne, he said.

Hong Leong Investment Bank (HLIB), however, has maintained its ‘Neutral’ call on the plantation sector as it believes the current high CPO price will trend down more noticeably in the second half of 2021 (2H21).

The downward trend in price is supported by the improving supply visibility for most vegetable oils in the coming season and limited demand growth potential amid high vegetable oil prices.

HLIB’s top picks are IOI Corp Bhd with target price (TP) of RM4.67, Kuala Lumpur Kepong Bhd (‘Buy’, TP: RM26.42) and TSH Resources Bhd (‘Buy’, TP: RM1.20).

HLIB maintained its CPO price assumptions of RM3,200/metric tonne (MT) for 2021 and RM2,800/MT for 2022 to 2023, as its believes CPO price has peaked, on the back of increasing optimism on vegetable oil supplies and absence of fresh demand catalyst.

“The surge in palm oil price has yet to result in demand pullback in a major way so far, as (i) current high palm oil price is driven mainly by supply shortage of major vegetable oils and low inventory levels among major importing countries, and (ii) palm’s price competitiveness over other competing oils.

“We believe a pullback in palm demand will kick in when a recovery in supply of major edible oils is in sight amid the absence of fresh demand catalyst, hence resulting in weaker CPO price,” it said in a recent note.

HLIB noted the labour shortfall issue in Malaysia to persist into the end of 2021 but palm oil production in the country will still come in higher in 2H21 compared to 1H21 on the back of seasonal factors.

It also anticipates palm oil production in Indonesia will remain on an uptrend (albeit a slower growth relative to previous years, due to a slowdown in new plantings in the past few years), due to seasonal factors and more conducive weather conditions.

HLIB also expects soybean output to improve as the US Department of Agriculture’s (USDA) crop progress report indicated US farmers planted 87.56 million acres (35.43 million ha) of soybean in marketing year of 2021 to 2022, which is 5.4% higher on-year.

In Brazil, USDA’s Foreign Agricultural Service projects soybean planted area to reach 40 million ha in the 2021 to 2022 season (from 38.5 million ha in 2020 to 2021 season).

The higher estimated acreage will result in soybean production in Brazil rising by 5% to 141 million MT in the 2021-22 season (from 134 million MT estimated in 2020 to 2021 season).

HLIB noted CPO’s price discount to soy oil has narrowed from an all-time-high of US$590/MT (in mid-June) to US$426/MT currently.

“We believe the wide price gap between the two will likely remain in the near future, given current tightness in soybean supply and seasonal pick up in palm production,” it said.