India could burn fingers with aid to palm refiners

India’s plan to raise domestic levy on refined palm oil, designed to protect its refiners from cheaper exports by top palm oil producer Indonesia, will backfire in the absence of rival suppliers to meet the appetite of the south Asian nation.

The world’s top edible oil buyer could end up spending more on Indonesian crude palm oil, which has risen as high as $84 over benchmark Malaysian futures after Indonesia raised taxes on the crude in the middle of September.

At the same time, Indonesia halved taxes on refined palm oil so as to boost exports as part of its tax system that aims to encourage downstream industries, secure domestic supplies and reduce volatility in cooking oil prices.

India needs crude palm oil to feed its refineries, but more expensive feedstock may force it to turn to refined palm oil — which could also prove costly if New Delhi implements its own plan to raise the commodity’s base value for tax purposes.

With inflation already running near 10 per cent — one of the highest levels among emerging economies — and domestic oilseed production insufficient to meet the needs of a population of 1.2 billion, such a result would be disastrous for India.

“At the end of the day, India wants to save its processors and Indonesia wants to support its processors. Trading will get complicated,” said Thomas Mielke, head of Hamburg-based oilseeds research house Oil World.

“These two aims go against one another and if it is true that Indonesia has large capacity in store, it could have an upper hand eventually.”

With No.2 palm oil producer Malaysia having already taken a similar step to protect its own refiners, levying its own high export tax on crude palm oil and curbs on tax-free exports of the grade, India has few alternative suppliers to turn to.

INDIA TO MORE THAN DOUBLE TAXABLE BASE
India now imposes a tax of 7.5 per cent on the tariff value of crude palm oil at $484 a tonne, irrespective of importers’ purchase price — a low amount to fork out.

While the government has ruled out raising the import tax for fear of stoking inflation, industry wants New Delhi to more than double the taxable price levels to $1,100 a tonne, as the level is outdated.

While the country’s food ministry supports the demand, any decision can only be made by Finance Minister Pranab Mukherjee. Government sources say India could bow to these demands in the next few days, possibly kicking in when the new marketing year starts next month.

Applying the existing 7.5 per cent import duty on the new tariff value, the landed cost of refined bleached and deodorised (RBD) palm olein could rise to $1,183 a tonne — an increase of 25 per cent, or $238, over tax-free crude palm oil.

That more than reverses a discount of $152 a tonne RBD palm olein now enjoys over crude palm oil imports thanks to the Indonesian tax change.

“With the lower refined palm oil export tax, Indonesia’s surplus refining capacity will ensure that crude palm oil export is reduced and replaced by export of refined palm olein,” said Dinesh Shahra, managing director of Ruchi Soya Industries , India’s biggest importer of edible oils.

On the surface the new tariff value could maintain the composition of India’s annual palm oil imports of some 6.3 million tonnes, with crude grade making up about 80 per cent and the rest from the refined variety.

But India will be hard pressed to maintain its import mix and preserve its processing capacity of 15 million tonnes — the result of investment of up to $2 billion — as Indonesia aggressively ramps up its own refineries.

INDONESIA’S REFINING CAPACITY
CIMB Investment Bank said in a note in September that Indonesia had 24 million tonnes of capacity by the end of 2009, much of it idle thanks to the previous tax regime that kept export taxes for crude and refined palm oil at par.

“Restarting at most takes six months. To build the refinery from scratch takes 18 to 24 months, so there is a very limited time frame for India to get used to the new landscape,” said an Indonesian trader with a refinery in Sumatra island.

Once Indonesia beefs up or restarts capacity, refined palm oil could easily make up 60 to 75 per cent of total exports that are expected to rise by at least 500,000 tonnes annually from 17 million tonnes this year, traders and planters estimate.

That will progressively limit Indonesian crude palm oil cargoes coming into India, further widening the premium consumers have to pay over benchmark palm oil futures.

Scrapping plans to raise the base tariff for refined edible oils might ease the problem of a huge import bill for India but Indonesia is unlikely to abandon the lower export tax as it seeks higher earnings and investment.

“If the officials go with this policy, either way the (Indian) refiners are going to shut down their capacity with less crude palm oil and more RBD palm oil coming in,” said a trader with a Singapore-based palm oil firm in Indonesia.