Regional Plantations - Maybank Kim Eng 2019-09-05: India Raises Duty On Malaysian Refined Palm Oil By 5-ppts

FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z)

Regional Plantations - India Raises Duty On Malaysian Refined Palm Oil By 5-ppts

As India, the world's largest importer of palm oil, raises import duties on Malaysian refined palm oil by 5-ppts for a period of 180 days, the industry is likely to lose some market share it has gained YTD. And Indonesian-based refiners/ exporters are set to benefit at the expense of Malaysia.
Overall, this may slow palm oil exports to India in the near term. Maintain Neutral on the sector.
Our BUYs in the region are First Resources and Bumitama Agri, Ta Ann & Sarawak Oil Palms.

According to media reports, the government of India has raised customs duty on refined palm oil imports from Malaysia by 5% to 50% (previously 45%), effectively eliminating a price advantage Malaysia refiners enjoyed over regional peers. The increase will come into immediate effect and in force for 180 days (expiring 2 Mar 2020).
Recall that on 1 Jan 2019, the government of India cut the import duties on
1. crude palm oil to 40% (from 44%) from Malaysia and ASEAN origins, and
2. refined palm oil to 45% (from 54%) only from Malaysia origin, while having a smaller reduction to 50% (from 54%) from the rest of ASEAN countries.
With this hike in import duties, India appears to have contravened earlier commitment made in a comprehensive economic cooperation agreement signed between Malaysia and India years ago to cap import duties at 45%.

According to import data published by the Solvent Extractors’ Association of India, India’s palm oil demand rose 12.9% y-o-y to 6.8mt (million tonnes) in Nov 2018 - July 2019 marketing period following the cut in import duty on palm oil. Palm oil’s import market share in India rose 6-ppts y-o-y to 64% during that period.
According to MPOB data, Malaysian exporters (especially refiners) were the biggest beneficiary as exports to India doubled y-o-y to 3.04mt during Jan-July 2019. Malaysian refiners’ gain was at the expense of other regional refiners especially Indonesia, and other soft oils exporters.
As Indian consumers are price sensitive, we believe palm oil will lose some market share to other soft oils over the next 180 days. The bigger loser will be Malaysian refiners while Indonesian refiners will gain as the standardization of import duty will create a more level playing field for the regional palm oil refiners.

According to the median of 12 estimates in a Bloomberg survey of analysts, traders and growers, Malaysia’s August palm oil stockpile is likely to have dipped further to 2.22mt (-11% y-o-y, -7% m-o-m) as exports jumped. We believe this may be partly due to frontloading of demand from India in anticipation of this 5% import duty on refined palm oil.
If the dip in stockpile turns out to be true, this will be the first time in 25 months that stockpile has declined y-o-y, a positive sign that stockpile is no longer ample. And this may pave the way for further CPO price recovery into 2020. MPOB will release official data on 10 Sept.

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-09-05

SGX Stock Analyst Report BUY MAINTAIN BUY 1.800 SAME 1.800

BUY MAINTAIN BUY 0.800 SAME 0.800