13/8/06 (The Hindu) Chennai  -  Despite the Centre cutting the Customs duty on palm group of oils by 10 percentage points on Friday, edible oil prices are likely to rule firm at least until November.

The duty was cut as part of the Union Government's efforts to curb inflation. While crude palm oil duty was cut to 70 per cent from 80 per cent, that of refined palm oil was slashed to 80 per cent from 90 per cent with immediate effect. "We don't expect the cut in Customs duty to pay dividends immediately," said Mr B.V. Mehta, Executive Director, Solvent Extractors Association of India.

Prices may rise

Though RBD palmolein reacted immediately on Saturday, dipping by Rs 9 to Rs 469 for 10 kg, prices are expected to rise on a variety of factors. Edible oil prices have increased by around 25 per cent since the beginning of the current fiscal. While RBD palmolein has gone up to Rs 469 for 10 kg on August 12 from Rs 386 on April 1, refined soya oil has increased to Rs 419-421 (Rs 386).

"Demand for edible oils is expected to rise with the approaching festivals. Also, prices in the global market are also seen firm for the next three months," trade sources said.

Open interest

Last week, crude palm oil futures on Bursa or the Malaysian Derivatives Exchange hit a two-year high of $452 a tonne. "Palm oil prices have been rising since April on Malaysian and Indonesia announcement that they will consider using it for bio-diesel production. Also, hedge funds have invested heavily in it," the sources said.

Open interest, an indicator of how the prices will behave, in palm oil has increased to 64,589 against the normal 35,000-40,000. "The increase in the open interest has happened only after April," the sources said.

Alternative fuels

"High crude price is behind the rise in the rates of vegetable oils. The global community has begun to look for alternative fuels and they think vegetable oils are one of the best. Rise in crude prices has also resulted in freight charges going up by $25-45 a tonne," the trade sources said.

Uptrend seen in soyabean

A rise in palm oil prices could lead to rise in the soyabean oil counter too. Though soya oil prices tended to slip last week on hopes of a better crop in the US following good weather conditions, the trade is of the view that it is only a matter of time before the rates begin to look north. "The difference between soya oil and palm oil has narrowed to $60 a tonne from around $120. When the difference narrows, the European countries could switch over widely to soyabean oil," the sources said.

The vegetable oil market has already begun to factor in a rise in the tariff value of the palm group of oils. The tariff value is the base price on which the Customs authorities compute the import duty. "We expect the tariff value for palm group of oils to particularly rise by $25 a tonne," they said. The revision is due on August 14.

Silver lining

However, the silver lining for the user industry and consumers is that prices could begin to decline towards the end of the year. "If you look at the open interest position in Malaysian palm oil, you can find that they have built it up only till November. That's a firm indication of the shape of things to come," the sources said.

Also with fears of geo-political concerns likely to recede, crude prices could begin to decline. "If crude prices slip to around $60 a barrel, then use of vegetable oils in bio-fuel will become unviable," the sources said.

Indian scenario

In the Indian context, they said the country wasn't looking to use palm oil or any other vegetable oil to produce bio-fuel. "Also, the 70-80 per cent Customs duty doesn't encourage such activity.

Malaysia and Indonesia can afford to produce bio-fuel from palm oil because they produce it there and costs are low for them," the source said. "In contrast, India is exporting ethanol and molasses."

Further rise in palm oil or any other imported vegetable oil could lead to consumers switching over to other oils such as cottonseed and coconut oils. "In Kerala, for instance, people switched over to palm oil since coconut oil prices shot up sharply. We cannot rule out the reverse now," they said.

Similarly, with two consecutive cotton crop topping 240 lakh bales (of 170 kg) and another similar crop on cards, availability of cottonseed oil would be no problem. Besides, other oils such as ones made from rice bran are gaining popularity.

"Then, like last year, we could see a good rabi oilseeds crop in view of a satisfactory water storage position. In the South, particularly Tamil Nadu, growers could go in for large-scale cultivation of groundnut as a short duration crop. All these point to pressure on the prices," the sources said.

`Release mustard stocks'

Mr B.V. Mehta said even now the Centre could rein in edible oil prices if it begins releasing the 28 lakh tonnes rapeseed/mustard stocks with it. "It will ensure a monthly mustard oil supply of 2.5 lakh tonnes. It will help in utilising the solvent units capacity, meet demand for rapeseed meal abroad, bring down stocks with Nafed and also help in next year's procurement," he said.

He also said the overall situation with regard to kharif oilseed crop was better and yield may make up for the 10 lakh hectare loss in coverage.