The Edge Markest (03/02/2021) - KUALA LUMPUR (Feb 3): India’s move to raise the effective import duty on crude palm oil (CPO) by 5.5 percentage points to 35.75%, effective 2 Feb 2021, is expected to weight on palm oil demand.

CGS-CIMB’s analyst Ng Lee Fang said in a note today that the move is negative as it will reduce CPO price competitiveness against other edible oils in India, while higher duties will result in higher cooking oil price.

“We estimate the revision will reduce CPO advantage in terms of duty gap against other competing edible oils like crude soybean oil, from 8.25 percentage points to only 2.75 percentage points,” she said.

According to Ng, India cut the import duty on crude palm oil from 27.5% to 15%, effective February 2, 2021 (Monday) in its 2021 Budget.

It also lowered the import duty for crude soybean oil and crude sunflower oil from 35% to 15%.

However, the government announced the imposition of the new 17.5% agriculture infrastructure and development (AID) cess on palm oil and 20% AID cess on soybean oil and sunflower oil.

On an overall basis, she estimated the revision will result in the effective import duty for CPO rising to 35.75% from 30.25%.

However, there is no change to the effective import duty for crude soybean oil and crude sunflower oil which remains at 38.5%, she added.

“To put things in perspective, the reference CPO price used to calculate the import duties in India was set at US$1,049 per tonne with effect from Jan 15, 2021. The increase in effective import duties implies additional tax of around US$57.7 per tonne (RM233 per tonne), which is likely to be passed on to consumers,” she said.

Ng said the higher effective import duties for CPO will raise the cooking oil price in India and could dampen demand for palm oil.

“This is near-term negative for CPO price as India was the largest importer of palm oil in 2019, accounting for 19% of total palm oil imports,” she said.

According to Ng, after the introduction of additional cess, the effective tax difference between CPO and refined palm olein narrows to 13.75% from 19.25% previously.

“This will be negative for the India palm oil refining industry and could favour imports of processed palm oil over CPO into India in view of the high export levy and export tax currently imposed on CPO in Indonesia which makes Indonesia palm oil refiners more competitive,” she said.

Overall, she viewed the news as a slight negative for upstream plantation companies and Indian refiners but a slight positive for Malaysia/Indonesia refiners and Indian farmers, due to plans to build domestic agriculture infrastructure with the cess.

She reiterated a neutral call on the sector.

Edited by Lam Jian Wyn

Read more at https://www.theedgemarkets.com/article/indias-higher-effective-import-duty-cpo-likely-weigh-palm-oil-demand