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Palm oil duty structure changes come at 'opportune moment'

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Changes to the duty structures made by both Indonesia and India this week should give palm oil demand a boost and have come at "an opportune moment," easing concerns about oversupply heading into the second half of the year, according to market participants.

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The Indonesian government on June 28 announced an $80/mt reduction in the ceiling rate of its crude palm oil export levy, effective July 2. Export duty was also lowered to $116/mt, from $183/mt.

The next day the Indian government followed this by reducing its import duty on CPO to 30.25% from 35.75%, and also lifting restrictions on refined palm oil and olein imports that had been in place since January 2020.

While the reduction in the Indonesian export levy and duty were largely priced in by the market, most participants were surprised by the Indian government's decision, as the overarching sentiment was that the duty would remain unchanged in the near term.

"The overtone in the market was decidedly bearish, with many convinced that stocks [in Malaysia] would start building up due to weak demand amid higher production. However, this decision will ease some supply overhang concerns," a producer told S&P Global Platts.

India-based consultancy Sunvin Group expects India's CPO imports over the third quarter to increase by around 150,000 mt/month following the changes.

"Imports for July to September should stand at around 850,000 mt monthly compared to the usual 700,000 mt. The impact of the duty reduction will manifest as an additional 400,000 mt to 500,000 mt of CPO imported into India over the next three months, with June imports at around 500,000 mt," said Sunvin's CEO Sandeep Bajoria.

"The import pace should be healthy till the first half of September, the second half will slow down as the oil has to land in India by September 30," he added.

A Malaysia-based producer felt that India's August imports could even exceed 900,000 mt. "Buyers will want to benefit from lower prices, and we do not know what will happen in October. It is logical that they will try to ship as much as they can before the import duty is possibly reinstated," said the producer.

An India-based trader said it was possible the import duty could be raised again in October as the timing coincided with the harvest of the Kharif crop, similar to the duty hike in February before the Rabi crop. "The government will try to ensure that local farmers are also protected, so international prices should not be much lower," said the trader.

While international palm oil prices are a determinant of palm oil demand, other factors such as food security, prices of competing edible oils, import margins and domestic production also come into play.

Sunvin's Bajoria highlighted that higher prices as a result of the added demand could erode the competitiveness of palm oil compared to soybean oil. "The spread between palm oil and soybean oil has to be at least $150/mt for the imports to increase by 500,000 mt during the concessionary period, this spread will be key to supporting Indian demand," he said.

Meanwhile, shipment volumes could also be affected by the pandemic situation in India, with vessel owners still hesitant to call at Indian ports.

"There are still quarantine requirements in some Malaysian and Indonesian ports as well as crew change restrictions in Singapore for vessels that have called at India," a shipbroker based in Singapore said, adding that freight to both East Coast of India (ECI) and the West Coast of India (WCI) has increased by $5/mt to the high $20s/mt, with some fixtures done to WCI in the mid $30s/mt.

"The increase in freight is not just based on fundamentals, bunker prices have also appreciated considerably. While cargo for July is relatively slack, freight has not retreated. Palm oil is not the best paying cargo, so charterers might have to pay up," the broker said.

Surprise on refined products

While the duty reduction on crude palm oil was met with relief, market participants were bemused by the decision to resume the import of refined palm products.

"Refiners were already facing weak demand, and some might have to reduce their run rates if there is more olein flooding into the country. I strongly feel that olein imports are not good for this country and its investments in refinery infrastructure. This should be appealed," said a trader based in India.

With more competitively priced CPO, refining margins could have picked up for local refiners but now they would be exposed to greater competition.

"We can only hope refinery sales improve. I am warily optimistic about the opening of the Hotels, Restaurants and Catering sector (Horeca)," said the trader. "That being said, many customers in the market had been waiting for some relief from high edible oil prices. Not only was there a global oilseed crunch, biofuel demand has also pushed edible oil prices skyward."

"The decision taken by both the Indian and Indonesian government to adjust the taxes, especially at this time, is very much welcome, and overdue," said the trader.