India's $16-billion vegetable oil industry is agog with rumours of an imminent increase in customs duty on imported vegetable oils. For over a year now, industry and trade associations have been flooding the Government with numerous representations to raise the customs duty on imports or to at least revise the tariff value of refined palmolein upwards to reflect market conditions; but policymakers have remained unmoved.

Now that palm oil prices at the origin (Malaysia, Indonesia) have declined by over 15 per cent (from $1,200 a tonne to a little above $1,000/t), the demand for a hike in duty has gathered strength. Will the Finance Ministry oblige importers and refiners this time?

Given that food inflation is still at elevated levels and New Delhi is still fighting a losing battle against high food prices, a hike in customs duty on imported edible oils appears unthinkable at the moment. Additionally, a weaker rupee is seen neutralising the benefit of fall in overseas edible oil prices in dollar terms. So, a hike in customs duty, for all practical purposes, rules itself out.

Revision of tariff

On the other hand, without doubt there is a strong case for revising the current tariff value of $484 a tonne on refined palmolein upwards. Looking at the current and emerging market conditions, a tariff value of $1,000 a tonne is justified. With customs duty levied at the rate of 7.5 per cent, the Government will collect $75 a tonne on imported refined palmolein, converted into rupees at the current exchange rate. This is nearly double the existing collection per tonne.

With the possibility that the rupee could gain moderately in the coming weeks and at the same time, palm oil market could face further downward pressure, and a hike in tariff value to reflect market conditions may not after all be a bad idea. The move will bring some relief to domestic refineries, but hardly hurt consumers. Most of the refineries depend on imported crude oil for their raw material requirement.

Refined oil arrivals have substantially expanded in the last six months and stood at 9.2 lakh tonnes during November 2011-April 2012, up from 4.9 lakh tonnes during similar period last year.

Why should palm oil prices go down further? Contrary to loud assertions by many analysts, palm oil prices have weakened considerably. For instance, Malaysian crude palm oil is currently quoted on the exchange at Malaysian ringgit (MYR) 3,100 a tonne, down from MYR 3,600/t early April. Now, prices are poised to decline further and the next target seems to be MYR 2,700/t.

All bearish factors are in operation simultaneously. Palm oil is in peak production season, the US soyabean crop is expected to rebound, crude oil prices have declined, China is holding at least one million tonnes of palm oil, and importantly, the pressure of burgeoning stocks in Malaysia and Indonesia. All these factors in addition to weak seasonal demand have combined to drive speculative capital out of the vegetable oil market.

Usually, the market ignores Indonesian stocks. But from anecdotal evidence it is becoming increasingly clear that Indonesia may be building huge palm oil stocks with some estimates going as high as 6.5 million tonnes. Even assuming some overstatement of the estimated stocks, many concede that Indonesian inventory won't be less than 5.0 million tonnes. Add to this, Malaysia's 2.0 million tonnes, the world is perhaps awash with palm oil. New Delhi must bear this big picture in mind.

Assuming normal weather in the northern hemisphere till harvest time in September/October, there is enough palm oil to ground. Indonesian palm plantations – at least 2.5 million hectares were planted in 2007-2009 – have entered the peak production cycle and are, therefore, yielding with great vigour.

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