03/12/2009 (Commodity Online), Mumbai - It looks like the crude palm oil prices are set for a bullish tone in the coming years. This was echoed at the Indonesian Palm Oil Conference being held at Bali from December 1-4. India is now in a tricky situation. Along with Pakistan and China, India is one of the leading importers of palm oil and related products.

The Solvent Extractors Association of India (SEA) has urged the Union Government to reimpose import duties and promote more cultivation of oil palms. There are several reasons why palm oil could be bullish in the coming 2-4 years, according to analysts. World's leading producer, Indonesia is planning to curtail exports of crude palm oil and instead divert it to production of value added palmolein. It has already plans to build three-polm oil based industry clusters near to Sumatra and is attracting international investment.

The other leader in Palm oil production, Malaysia's output will see a drastic fall due the El Nino forecasted and massive replantation scheme adopted in the country. Replanting is likely to reduce output by 700,000 metric tonnes in the next 3-4 years. Palm oil prices have climbed due to a combination of factors including higher input costs, weak dollar and steady export demand pushing it to 2,521 Malaysian Ringgits.Demand continues to be robust in India and China thus pushing up futures prices at Bursa Commodity Exchange.

Dorab A Mistry, President of Godrej International said recently that prices may climb to 3000 ringgit by the end of next year if crude oil advances to $100 a barrel. Drought in Indonesia is also set to lower production and availability of the oil in 2010.

In such a scenario, Indian government needs to act drastically if it is to reduce its foreign exchange outgo on edible oil imports and the need to to do away with import duties to curb prices. The weakest monsoon in almost four decades in India this year damaged rice and oilseed crops. Soybean and corn harvests in China may shrink because of drought and cold weather, the US Department of Agriculture’s Foreign Agricultural Service said recently.

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Malaysia’s palm oil exports jumped 1.8 percent in November to 1.46 million tons compared with October, media reports indicated. Indonesia and Malaysia make up 87 percent of global output of the tropical oil. Indonesia has the potential to more than double the area of land producing palm oil, Agriculture Minister Suswono said at the Bali conference.

Meanwhile, Pakistan will likely import over 100,000 tonnes of palm oil for December despite high domestic inventories. Pakistan made heavy palm oil purchases of between 150,000 and 175,000 tonnes in September and October and bought another 96,000 tonnes from Malaysia in November that boosted domestic stocks. Purchases by India, Pakistan and China and downfall in soybean output in USA could lead to bullish situation continuing ahead for some time.

Palm oil prices remain generally high in the January-March quarter and that will also prompt Pakistani traders to buy more in December, analysts said.

Local supplies in mandis have stagnated as big farmers are keeping away from markets expecting higher prices with the result crushing capacity is remaining idle in many parts of the country. Higher oil seed and lower oil prices are making crushing unviable, according to SEA

The domestic turnover of the vegetable oil industry is Rs 100,000 crore. The import-export turnover is Rs 40,000 crore per annum, consisting of Rs 28,000 crore of import of vegetable oils and Rs 12,000 crore export of oilmeals, oilseeds, castor oil, groundnut oil and vegetable fats of tree-borne oilseeds.

Last oil year (November 2008-October 2009), the country imported 8.6 million tonnes of vegetable oil worth Rs 28,000 crore, set to go up this year on increasing imports at lower price. Out of 15.5 million tonnes of the country’s vegetable oil demand, local production has remained stagnant between 6.5-7 million tonnes. The remaining quantity is met through imports, primarily from Argentina, Indonesia and Malaysia.

Unlike, in previous years, government cannot just continue with zero-import duties and make the larger consuming households happy. The likely bullish phase ahead for palm oil and the need to have remunerative prices back home for crushers should put the government in a fix.In the past, the Government of India was getting revenue from import duty on edible oils to the tune of Rs 5,000- 6,000 crore per annum, which has declined to Rs 200 crore. Crude vegetable oil attracts nil import duty, while the refined oil levy is 7.5 per cent from April 2008.

It needs to come up with policy options to solve the crisis in the edible oils industry and perhaps, the Union Budget would be the right forum to announce such initiatives and perhaps, the SEA memorandum opens the issue for a lively debate ahead.