Agribusiness - CGS-CIMB Research 2018-06-20: Potential Impact Of India Duties Revision On Palm Oil

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Agribusiness - Potential Impact Of India Duties Revision On Palm Oil

India raised import duties on edible oils (ex-palm oil) by 5-10% pts on 14 Jun 2018.
This only partially restores palm oil competitiveness. Recall that India hiked import duties on palm oil by 14% pts on 1 Mar but kept import duties on other oils intact.
We view this as slightly positive for CPO demand due to narrowing duty differential with other edible oils.
We expect India’s demand for palm oil to improve gradually due to high edible oils stock in India currently.
Maintain NEUTRAL call in view of unexciting near-term earnings prospects for planters.

The government of India has recently raised import duties on crude and refined soybean oil, sunflower oil and rapeseed oil to the highest level in more than a decade to support local farmers. India raised import duties on crude soybean oil to 35% from 30% and on crude rapeseed oil and sunflower oil to 35% from 25%. The duty on the respective refined edible oils was lifted from 35% to 45%.
The new duties came into effect on 14 Jun 2018.

This is not a major surprise to the market as industry associations like the Solvent Extractors’ Association of India (SEA) have been lobbying for the government to raise the import duty on soybean oils and sunflower oils to protect the interest of farmers. The industry body is also asking the government to raise the duty differential between crude palm oil and refined palm oil to at least 15% from 10% currently.

We view this as slightly positive for CPO demand as it will narrow the duty differential between palm oil and other edible oils, making palm oil more competitive in India. This could help boost palm oil exports to India which have been significantly impacted by a 14%-pt hike in import duties on 1 Mar 2018 to 44% for CPO and 54% for refined palm oil.
Following the revision, the import duty differential between palm oil and other edible oils in India has narrowed to 10% pts from 15-21% pts, previously.

Our tracking of India’s monthly palm oil imports revealed that palm oil’s share of edible oil imports have fallen from 65% of total edible oil imports in Aug 2017 to only 40% in May 2018, since India started raising effective refined palm oil import duties from 15.5% prior to 11 Aug 2017 to 59.4% effective 1 Mar 2018.
The decline in palm oil’s market share of total imported edible oils was partly due to the widening duty gap between palm oil and other edible oils to as high as 15.4-20.9% effective 1 Mar 2018 until 14 Jun 2018.

We view this latest development as only slightly positive as the change is not sufficient to fully restore palm oil competitiveness against other edible oils in the Indian market unless the palm oil price discount against other edible oils widens further.
To put things into perspective, the landed CPO price in India for May was US$652 per tonne which represents a US$119 per tonne or 15% discount against soybean oil. But the discount will be partially offset by the 10% import duty gap between palm oil and soybean oil.

We expect India’s palm oil demand to improve slightly with the latest revision in import duties. However, the improvement is likely to be gradual due to the current high stock positions at India’s ports of 2.6m tonnes, or around 42 days requirement. This, coupled with rising palm oil supplies prospects, is likely to put pressure on near-term CPO prices.
In view of the unexciting near-term price and earnings prospects, we retain our Neutral rating on the sector.
Our top three picks in the region are Wilmar, First Resources and Genting Plantations.

Ivy NG Lee Fang CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-06-20

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