Palm oil prices to go up by 18-20 pc in India

Domestic palm oil prices are expected to rise by 18-20 per cent following a series of duty hikes on edible oils and a sharper increase in import duty for refined palm oil, a report said.

A series of duty hikes on edible oils since August 2017 to support prices and crushing of domestic oilseeds and a sharper increase in import duty for refined palm oil will make it more expensive in India, the rating agency Crisil said in a report.

Considering all the duty hikes since August 2017 and the 10 per cent social welfare cess, and assuming these remain unchanged through oil year (OY) 2017-18, we expect average palm oil prices in the domestic market to increase 18-20 per cent on-year in OY 2017-18, it said.

The duty hikes will offset the softening in international prices following a bumper crop, though these could remain dynamic and responsive to exchange rates, food inflation and export duty changes of trade partners, the report said.

Domestic palm oil prices in the past typically moved in line with international prices as 98 per cent of the oil is imported. A clear diverging trend is seen since the hiking of domestic duties. An appreciating rupee till January 2018 curbed the impact of the divergence to some extent. However, this trend has reversed since February. We expect the rupee to continue to depreciate in coming months, but remain stable on average compared with OY 2016-17, putting pressure on domestic prices, it said.

To promote domestic refining of palm oil, the government, in addition to the duty hikes, also raised the differential import duty between crude and refined palm oil. The differential since August 2017 stands at 10 per cent and 11 per cent since March 2018, including social welfare surcharge, up from 7.5 per cent since 2014 and 5 per cent since 2013.

Interestingly, Malaysia, in January 2018, suspended export taxes on crude palm oil for a three-month period to encourage exports and support prices. This is contrary to the general trend of both the large producers discouraging crude palm exports by duty levies in the past in order to ensure higher utilisation for their refineries.

On the global front, Crisil expects production of palm oil fruit to increase 7 per cent to 69 million tonne in OY 2017-18, over the 10 per cent increase seen in OY 2016-17, driven by Indonesia and Malaysia. International prices are consequently expected to soften by 5 per cent.

India being the largest importer of palm oil in the world, and a key trading partner for both Indonesia and Malaysia, lower imports resulting from duty increases could weigh further on international prices of palm oil in the near term, the report added.