‘Bold move’: Indian industry fears local palm oil demand dip as duty change favours soft oils

16-Nov-2021 - Last updated on 16-Nov-2021 at 03:13 GMT

The Indian palm oil industry is concerned that palm oil demand in the country may dip and lose out to edible soft oils in the short term. ©Getty Images

The Indian palm oil industry is concerned that palm oil demand in the country may dip and lose out to edible soft oils in the short term given the higher duties it is subject to after a recent levy revision by the local government.

Over the past two years and through the COVID-19 outbreak, the palm oil sector in India has undergone multiple changes to its taxation structure due to inflation and prices hitting record highs.

The local oils and fats sector saw its inflation rate rise from 14% to 35% between February and June 2021, forcing the government to act after public outrage over the situation.

Palm oil has also been one of the most significantly affected sectors in the country, as the majority of palm oil in India is used in the HORECA and foodservice sectors, most of which were closed due to COVID-19 lockdowns leading to significant demand restrictions.

“Palm oil demand in India took a big hit in 2020 by about 2.5mn MT due to COVID-19 [and] the sector has also undergone many duty structure revisions,” Indian Vegetable Oil Produce Association (IVPA) Vice President Vipin Gupta said during a recent Malaysian Palm Oil Council (MPOC) virtual event.

“This started from August 2019 when the government imposed a 5% safeguard duty and banned refined olein imports, then removing the safeguard duty a few months later, then reducing overall duties for all oils, then increasing duties again once prices looked positive, allowing refined olein imports, then another three duty cuts were implemented on crude palm oil (CPO) to combat inflation.

“All in all, this has now reached a stage where the duty imposed on CPO imports is historically low at 7.5%. The risk this carries though is that the government does not have many controls left to control inflation further, as any further cuts from here on, even until 0%, would not make a big difference on inflation rates – so if market prices are still not brought under control from these measures, a big challenge lies ahead.”

In addition to inflation woes, the local industry is also facing the added concern of severe competition from soft oils such as soybean and sunflower, particularly after a recent government announcement revealed lower levies for soft oil imports compared to palm oil.

“The Indian government made a really bold move to cut import duties by about 18% across all oils [to bring inflation under control] in October 2021,” said Gupta.

“Surprisingly though, this included a larger reduction for soft oils compared to palm oil – duties for soft oils are 5% compared to palm oil’s current 7.5%, even amidst the current soybean harvest peak in India when local soybean oil supply is [likely to not be lacking].

“The government probably has their reasons for this decision, having to take all stakeholders from consumers to industry to producers into consideration, and soft oils do certainly have higher household demand so this is probably to help them, but we do believe that a lot of demand will start to shift from palm oil to soft oils aided by these duty differentials.

“The implications are far reaching for the industry, and we are already seeing early signs of this shift, so expect demand for palm oil [to dip] in the immediate term, especially over the next three to four months.

“IVPA believes that this probably will be the last step by the government in terms of duty reductions and we do hope inflation will come under control as a result – but we also do feel it will be tough to ensure prices do not run away after this bold step.”

Call for refined palm oil ban

Gupta also stated that the palm oil industry is calling for the government to reinstate restrictions on refined palm oil imports, claiming that the current situation where refined palm oil is allowed to ‘freely’ enter the country is detrimental to the local industry./

“India’s palm oil imports dropped by some 14% market share from 64% in 2018-2019 to 52% in 2019-2020 due to COVID-19, but has since bounced back to pre-COVID-19 levels of 62% market share in 2020-2021,” he said.

“What has happened though is that the percentage of imported crude palm oil has increased significantly from 71% pre-COVID to 94% currently – this is severely affecting the capacity utilisation of local Indian refineries.

“As such, IVPA is calling for the government to not extend the free imports of [refined] olein beyond the expected end date of December 2021, as this has been detrimental to the Indian refining industry.”

In addition, IVPA is also calling upon the government to ensure that the differentials between crude and refined palm oil imports be kept above 15% so as to prevent importers turning to refined again.

“Our numbers show that when the import duty differential between CPO and [refined] olein goes below 10%, this results in a big surge in olein imports which is severely detrimental to local industry established, particularly refineries,” he said.

“We are also requesting that this duty differential be kept at a minimum of 15% - ideally 20% - but definitely not below as any duty differential below that affects industry badly both in terms of capacity utilisation and margins structure.”

The industry is also asking for a pricing and duties system that allows them more visibility in order to not be taken by surprise.

“[We need a system that] gives more visibility to the industry on any impending changes, so that we can maintain a constant palm oil supply chain, as opposed to this being distorted due to rumours and leading to shortage or excess stock in the country,” Gupta added.

“[More] stability and transparency needs to be provided [to the industry] so as to act in a more timely manner, and to stop rumours flying around whenever prices look set to rise up or fall down.”