21/09/05 NEW DELHI (Dow Jones)--The recent decision by India toeffectively reduce edible oil import duties by lowering government-setbase prices will lead to a surge in imports in the coming months andlikely keep domestic prices under pressure for several months, analystssaid Wednesday.

While this could be good news for consumers as demand is expected to pickup during the festive season starting mid-October, depressed prices mayreduce the profits of processors and oilseed growers.

Late last week, the government cut the base import price of soy oil andpalm oils by $11-$52 per metric ton. The base import price of soy oil wascut to $506/ton from $558/ton while that of crude palm oil was cut to$397/ton from $423/ton.

A cut in the base price reduces import costs as import taxes arecalculated based on these prices regardless of the actual price at whichimporters buy the commodity.

"The base price has been cut at a time when the country is already facinga huge pressure from imports, which is neither in the interest of thedomestic industry nor the farmers," said Rajesh Agarwal, chairman ofSoybean Processors Association of India, or SOPA, a lobby group of soyprocessors.

As imports become cheaper, traders are encouraged to buy more edible oilfrom abroad rather than buy locally cultivated seeds for crushing and oilextraction, he said.

Edible oil imports during the November 2004-August 2005 period have shotup to 4.17 million metric tons from 3.29 million tons in the year-earlierperiod, according to industry estimates.

"In India, edible oils consumption is price elastic. It is natural that ifprices go down, household and industry purchases will increase and in turnpush up imports," said B.V. Mehta, executive director of the SolventExtractors Association of India, another industry lobby group.

The trend observed in the past few months of higher growth in soy oilimports compared to that in palm oil is also likely to continue after thelatest cut in base import prices, Mehta said.

According to industry data, India imported 1.54 million tons of crude soyoil from November-August, up sharply from 596,000 tons imported in theyear-earlier period.

The rise in crude palm oil imports was much slower during the period,rising 1.99 million tons from 1.60 million tons.

This is because soy oil is cheaper to import after accounting for thetaxes levied by the federal government, said Mehta. The import duty on soyoil is 45%, compared with 80% on crude palm oil.

Good Crop In The Pipeline To Further Pressure Prices

Domestic oilseeds crushers, oil extractors and bean processors haven'tbeen happy with the government's decision to cut the base import price,because they fear a good harvest, expected to begin by the end of themonth, will put further pressure on prices.

"They should not have cut the base price at a time when the domesticoilseeds harvest is round the corner," said SOPA's Agarwal.

The base price cut will bring down local prices of oilseeds and edibleoils and affect income of farmers, he said.

On Monday, the first working day after base prices were cut, refined soyoil was offered in the domestic market at INR34,800 a ton, down fromINR35,000/ton a week ago.

Refined, bleached and deodorized palm oil was offered lower by INR200 atINR36,200/ton. Crude palm oil prices fell to INR32,200/ton fromINR32,500/ton a week ago.

Analysts believe an eagerness to keep edible oil prices low during thefestive season could have prompted the government to cut the base importprice.

Domestic prices usually rise during this period as demand for the festivalseason picks up by early October, said New Delhi-based commodities analystBhagwat Garg.

Indian edible oil consumption increases during the festival season, asdelicacies cooked in oil form an essential part of festivals such as DurgaPuja, Navratri and Diwali. The festive season that begins in Octoberextends to the end of November.

But Mehta said the current bearishness in edible oil prices may continuethis year as the local oilseeds crop is expected to produce another goodharvest that will nearly match last year's levels.

Prospects for this year's oilseeds crop have improved after recentwidespread rains across the country, particularly in the major oilseedgrowing provinces such as Gujarat, Maharashtra and Madhya Pradesh. Therains came after a prolonged dry spell in August.

According to latest government estimates, India's summer-sown oilseedsoutput is likely to show only a marginal decline to 14.56 million tonsfrom 14.94 million tons in the year-earlier period.

"Things have improved, we do not expect any significant decline in outputof the summer-sown oilseeds crop," said Sandeep Bajoria, president of theCentral Organisation of Oil Industry and Trade.

Crude Oil Imports Exceeding Local Demand

Local industry participants say even before the base price was cut, Indiahas been importing more crude edible oil than required for immediatedomestic consumption, because refiners want to take advantage of thecurrent low international prices.

Edible oil imports in September, for example, are likely to be more than500,00 tons, said Mehta.

If proved right, September will be the third straight month when importstopped 500,000 tons. India imports mostly crude oils.

"Imports are more than required because numerous new edible oil refiningunits have come up near the ports," said Agarwal.

Units with combined daily capacity to refine 7,000 tons of edible oil havecome up near the ports along the west coast, Mehta confirmed.

These units are currently operating at only 25% of their capacity, Agarwaladded. The desire to boost capacity utilization has prompted the refiningunits to import more crude oil than needed to meet domestic demand forrefined oils, he said.

India imports palm oil from Malaysia and Indonesia while most of itssoyoil imports are from the U.S. or South America.