India cuts import taxes for the 4th time this year

CPO price hits historic high of above MYR5,000/t

India’s drastic import tax cuts announced late yesterday afternoon helped push 3M FCPO to MYR5,021/t (+3.4% DoD), a historic high. Import taxes of key vegetable oils were effectively cut by 15.0-17.5-ppts with
immediate effect. Although we are overall positive on this development, crude SBO and crude SFO will now have a 2.5-ppts import tax advantage over CPO following this revision (previously on par). We expect CPO to lose some market share in India. Preferred BUYs: KLK, SOP and BPLANT.

Drastic cut of 15.0-17.5-ppts in Indian import taxes

According to media reports, India – the world’s largest importer of palm oil has further cut the import taxes on edible oils in its bid to alleviate the impact of soaring global prices in the domestic market ahead of its Diwali festivities. The base import duty of CPO, crude SBO and crude SFO were scrapped (previously 2.5%) while the import levies on CPO were reduced by 12.5-ppts to 7.5% and the levies for crude SBO and crude SFO were cut by 15.0-ppts to 5.0%. This brings the effective import taxes (ie. duty plus levy) on CPO to 7.5% (from 22.5%), and crude SBO and SFO to 5.0% (from 22.5%) – see Fig.1. Meanwhile, the import taxes on RBD (refined, bleached and deodorised) PO, olein, SBO and SFO have also been lowered by 15-ppts to 17.5% (from 32.5%). The new import taxes will be effective 14 Oct 2021 to 31 Mar 2022.

India’s demand may stay robust till Diwali

In theory, the drastic cut in import taxes will help to encourage sufficient purchase of edible oils ahead of its Diwali celebration (4 Nov). However, we also note that India has recently rebuilt its inventories with
stockpile reaching 2.0mt (+25% YoY) as at 1 October 2021 – see Figs.2-5. According to India’s Solvent Extractors Association, between Nov 2020 and Sept 2021 period, India imported 12.09mt (+1.1% YoY over the same period) of vegetable oils despite rising vegetable oil prices. And PO’s total market share of all imports was 63% during this period.

CPO price discount to SBO has narrowed

Even though we expect CPO to lose some market share in India to SBO and SFO following the tax cuts, the overall demand of vegetable oil imports from India is likely to rise in the immediate term. It is also
important to note that the recent CPO price rally to above MYR5,000/t (spot month) has further narrowed CPO price discounts to US 1M SBO (USD69/t) and Argentina CIF Rotterdam (USD101/t) on 12 Oct 2021,
below their historical averages (Figs.6-9), making PO less price competitive vis-à-vis other major oils. We maintain our view that the current high CPO price is not sustainable as a wider discount is needed to
sustain demand. But overall, CPO price will likely stay relatively lofty till 1Q22.