Plantation Sector - Indian government increases import tax rate on refined oil OVERWEIGHT

- Reuters reported that India has doubled the import taxes on refined edible oil. This is in response to Indonesia’s tax structure, which has effectively lowered price of crude palm oil in the country and created a cost advantage for the refiners. 

- As a result, palm oil refiners in India have been hurt by competition from Indonesia as importers in India prefer to buy refined palm products instead of crude. With the increase, the import tax rate for refined edible oils in India is now 15% instead of 7.5% previously.  

- We believe that this development is positive for Malaysian and Indonesian upstream players. However, the impact on Malaysian refiners is neutral. We believe that Indonesian refiners would feel the impact from India’s increase in the tax rate of refined edible oils more than the Malaysian refiners. Large palm oil refiners in Indonesia include Wilmar International and Golden Agri Group.

- With the increase in the import tax rate in India, demand for crude palm oil from the Indian importers is likely to improve. In contrast, demand for refined palm oil could weaken. The effective rate taxed on CPO would only be Indonesia’s export tax rate of 15% as India does not impose an import tax rate on crude palm oil. In comparison, refined palm oil would attract an import tax rate of 15% from India and an export tax rate of 5% from Indonesia.

- We reckon that this development would improve demand for CPO. It is likely that CPO prices in Indonesia would increase. This would narrow the price differential between CPO prices in Malaysia and Indonesia.  

- The smaller difference in respect of the cost of CPO for the Malaysian and Indonesian refiners would benefit Malaysian refiners. However at the same time, as there would be smaller proportion of demand of refined palm oil from India as importers buy more palm oil in crude form.  

- We believe that Malaysia would export more refined palm oil to China. Geographically, Malaysia is closer to China compared to Indonesia. With the decline in the cost advantage of CPO for Indonesian refiners, we reckon that Malaysian refiners would have the advantage of lower shipping cost when exporting to China.  

- The issue now is whether the Indonesian government would respond to India’s increase in the import tax rate for refined palm oil. We believe that any retaliation would complicate matters further. The Malaysian government is likely to remain on the sidelines. We remain positive on the plantation sector not only on this  positive development for upstream players in Malaysia and Indonesia, but also because of the tight global supply in vegetable oils.

Source: AmeSecurities