Plantation Sector - India officially increases benchmark import price OVERWEIGHT

- Bloomberg reported that India has raised the benchmark import price of refined palm olein by 118% from US$484/tonne to US$1,053/tonne. 

- Last month, India proposed to double import taxes on refined palm oil products in response to competition from Indonesian palm oil refiners. It is estimated that the palm oil refining industry in India has a capacity of more than 12mil tonnes/year.

- Based on the new benchmark import price, we reckon that the import tax bill for Indian importers would increase by 119%. Presently, India imposes a tax rate of 7.5% on imports of refined palm oil and 0% on imports of crude palm oil.

- India’s new import tax structure would encourage importers to buy more palm oil in crude form compared to refined form.

- As mentioned previously, we reckon that the revision in India’s import tax structure would benefit upstream plantation players. We think that  the impact would be neutral for Malaysian palm oil refiners and negative for Indonesian palm oil refiners.

- We reckon that there would be more exports of CPO heading to India, cushioning any increase in palm oil inventory. This is especially so since Malaysia has increased the taxfree CPO export quota by another two million tonnes this year. 

- With India buying more palm oil in crude form coupled with the increase in new palm oil refining capacity in Indonesia, we believe that domestic CPO price in Indonesia would improve. 

- As such, there is potential for the price difference between CPO in Indonesia and Malaysia to narrow. Currently, the price disparity between the two is about RM497/tonne. 

- This would affect palm oil refiners in Indonesia. Today, Indonesia announced that it has left the export tax rate for CPO unchanged at 15% for August. Export tax rate for refined palm oil is also unchanged at 5%. 

- As for palm oil refiners in Malaysia, we reckon that they would benefit from the smaller cost advantage enjoyed by their Indonesian counterparts. However, this would be partly negated by a switch of demand from refined to crude palm oil by the Indian importers. 

- We remain positive on the plantation sector. We expect CPO prices to recover underpinned by tight global supply of vegetable oils and resilient demand from food-based industries.   

Source: AmeSecurities