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'Import duty reduction on Palm Oil to reprieve end consumers from swelling edible oil prices'

Malaysia and Indonesia both are entering in their high production cycle that might contain rally in BMD CPO after some temporary gains.

July 03, 2021 / 01:10 PM IST
Source: Reuters

Source: Reuters

After almost a month of uncertainty relating to import duty cut on edible oil, the government of India finally reduced import duty on Crude Palm Oil to 30.25 percent (10 percent basic duty + 17.5 percent AIDC +10 percent surcharge) from 35.75 percent set earlier (15 percent basic duty + 17.5 percent AIDC+ 10 percent surcharge), with effect from 1st July till the end of September.

Import duty on refined palm oil is also reduced to 41.25 percent from 49.5 percent earlier, while the same on Soy oil is kept unchanged at 38.50 percent, as per the Central Board of Indirect Taxes and Customs (CBIC) Notification. Apart from giving temporary relief to end consumers, the move is also aimed to safeguard the interest of farmers as the possibility of higher duties from October onwards will support prices of oilseeds when the peak supply season kicks in.

The government had tried to alleviate persistently rising edible oil prices last November also by reducing import duty on palm oil, which actually backfired and pushed BMD CPO (Bursa Malaysia Derivatives - Crude palm oil) prices above the horizon as the primitive reason behind that rally was an acute shortage of all the edible oils across the world hit by La-Nina and supply disruption due to Covid related movement restrictions in key edible oil producing nations. Lower import duty by India in fact, embolden both Malaysia & Indonesia to impose higher export taxes on palm products since November. It won’t be a surprise if Malaysia increases the export tax from 8 percent at present from August month onwards or revise higher base export price for palm products again, which will again bring back things from where it started for Indian consumers.

However, things are a bit different now in the international market. Production of Palm oil has been considerably increasing in Malaysia for the past many months and negligible growth in exports are gradually pushing higher stocks in the country. Soy oil prices and sunflower oil prices have also crashed recently amid the prospect of bumper Soybean output in the US & Brazil and Sunflower seed in Ukraine this season. Malaysia and Indonesia both are entering their high production cycle that might contain a rally in BMD CPO after some temporary gains. Indonesia also reducing maximum exports rates and reducing the same for July month onwards is also negative for BMD CPO.

Meanwhile, the arrival of the Indian festive season in the coming weeks might coincide with the possible third wave of COVID as a new variant of the virus is gradually spreading in major consuming states of the home country, which might again leave festive demand for agricultural commodities on a tenterhook. Progress of Soybean sowing in the home country will be very crucial for edible oil price direction as IMD projections of a disturbance in rains for the next few days in key soybean producing regions have also lifted Soybean prices by around Rs 450 in the first four sessions of this week. To conclude, we expect palm oil prices to marginally decline for the short term but subsequent gains in BMD CPO, prospects of higher export tax levy by exporting nations and optimism of festive demand from August onwards might provide a strong floor to domestic palm oil prices.

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Ravindra Rao
Ravindra Rao Ravindra V Rao is the Head - Commodity Research at Kotak Securities.
first published: Jul 3, 2021 01:10 pm