25/07/2013 (Business Standard) - Eight edible oil refinery projects, four large ones, that were scheduled to commence commercial production this financial year have deferred their plans or reduced operating capacity to avoid losses due to unfavourable duty structures which makes refining business unviable. Therefore, an investment worth Rs 147 crore is stuck in various refinery projects across India.

Andhra Pradesh based Gemini Edibles & Fats India had earlier proposed to set up a 200 tonnes per day (TPD) of refinery in Kakinada to tap north coastal districts of Andhra Pradesh and Odisha. The project with an investment of Rs 25 crore has been deferred indefinitely due to inverse duty structure in both India, the importing country, and Indonesia, one of the world’s largest exporters.

'We have been struggling to convince the government to increase import duty on refined oil (refined, bleached and deodorized or RBD palm olein) and lower on crude oil to promote domestic refineries,” said Pradeep Chowdhry, managing director of Gemini Edibles & Fats India, a subsidiary of India’s largest edible oil producer Ruchi Soya Industries Ltd.

In fact, the government of Indonesia has levied higher export duty on crude palm oil (CPO) at 10.5% for July (form 9% in June) and lower on RBD at 4% to promote local refineries. Also, Malaysia enjoys an export duty on CPO at 4.5% and RBD palm olein at 'nil”. Malaysia and Indonesia jointly supply about 87% of the world’s palm oil demand.

In contrast, the government of India narrowed the differential tax between CPO and RBD palm olein to 5% from the earlier 7.5% through levy of 2.5% import duty on CPO. For a sustainable refining business, the differential duty should be at least 12.5% by taxing RBD palm olein more.

The inverted tax structure in Indonesia and Malaysia followed by the levy of 2.5% import duty on CPO made the raw material costlier than RBD olein. Consequently, refiners have evinced interest more in trading business rather than utilizing their installed capacity to a maximum level. The situation has made domestic refining capacity idle.

According to reports, Malaysia and Indonesia are likely to close the year with 19 million tonnes and 28.5 million tonnes of palm oil in 2012-2013, up by 8.8% and 4.4%, respectively. Sluggish demand from importing countries, particularly China and India, on account of higher stock levels and currency fluctuation has led to stockpile ups in exporting countries.

'Smaller players with efficient cost structures and ability to offload at much lower prices will give a tough competition to their organised sector players. Refiners are likely to run at capacity utilisation of 30 – 35% in the near term compared with 50% earlier. Under-absorption of fixed costs is likely to dent the overall profitability and return ratios for most players,” said Janhavi Prabhu, an analyst with India Ratings.

India imports around 60% of its 16.5 million tonnes of annual edible oil consumption from Malaysia and Indonesia due to stagnant domestic production of oilseeds.

Data compiled by the Solvent Extractors’ Association (SEA) showed that between November 2012 and June 2013, the contribution of refined oils in overall imported vegetable oil jumped to 22% at 1.54 million tonnes as compared to 19% at 1.21 million tonnes in the corresponding period last year.