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Major edible oil refineries face duty roadblocks

Inverse duty structure in exporting countries make import of refined oil cheaper, idling domestic refineries

Dilip Kumar Jha  |  Mumbai 

Eight refinery projects, including four large ones, scheduled to commence commercial production in FY14, have either deferred their plans or reduced operating capacity. Reason: unfavourable duty structures, which make the business unviable. Precisely because of this reason, investments worth Rs 147 crore are stuck in various refinery projects across India.

Andhra Pradesh-based & Fats India had earlier proposed to set up a 200 tonnes a day (TPD) of refinery in Kakinada to tap north coastal districts of the Andhra Pradesh and Odisha. The project, with an investment of Rs 25 crore, has been deferred indefinitely due to an inverse duty structure in India, the importing country, as well as Indonesia, one of the world’s largest exporters.

“We have been struggling to convince the government to increase import duty on refined oil (refined, bleached and de-odourised or RBD palmolein) and lower on crude oil to promote domestic refineries,” said Pradeep Chowdhry, managing director of & Fats India, a subsidiary of India’s largest producer Industries. In fact, the Indonesian government increased export duty on crude palm oil (CPO) from nine per cent in June to 10.5 per cent for July. The country also has a lower duty on RBD at four per cent to promote local refineries.

On other hand, Malaysia has a relatively lower export duty on CPO at 4.5 per cent and RBD palmolein at ‘nil’. Malaysia and Indonesia jointly supply about 87 per cent of the world’s palm oil demand.

In contrast, the Indian government narrowed the differential tax between CPO and RBD palmolein to five per cent from the earlier 7.5 per cent through a levy of 2.5 per cent import duty on CPO. For a sustainable refining business, the differential duty should be at least 12.5 per cent by taxing RBD palm olein more.

The inverted tax structure in Indonesia and Malaysia, followed by the levy of 2.5 per cent import duty on CPO, made the raw material costlier than RBD olein. Consequently, refiners have evinced interest more in trading business rather than utilising their installed capacity to a maximum level. The situation has made domestic refining capacity idle.

According to reports, Malaysia and Indonesia are likely to close the year with 19 million tonnes and 28.5 million tonnes of palm oil. Sluggish demand from importing countries, particularly China and India, on account of higher stock levels and currency fluctuation has led to stockpile ups in exporting countries.

“Smaller players with efficient cost structures and ability to offload at much lower prices will give a tough competition to their organised sector players. Refiners are likely to run at capacity utilisation of 30-35 per cent in the near-term, compared with 50 per cent earlier. Under-absorption of fixed costs is likely to dent the overall profitability and return ratios for most players,” said Janhavi Prabhu, an analyst with India Ratings.

India imports around 60 per cent of its 16.5 million tonnes of annual consumption from Malaysia and Indonesia due to stagnant domestic production of oilseeds.

Data compiled by the Solvent Extractors’ Association (SEA) showed that between November 2012 and June 2013, the contribution of refined oils in overall imported vegetable oil jumped to 22 per cent at 1.54 million tonnes.

First Published: Sat, July 27 2013. 21:53 IST