No major impact to local refiners from India’s revised import tax
by Venu Puthankattil, firstname.lastname@example.org. Posted on July 24, 2012, Tuesday
KUCHING: The unfreezing of India’s base import price of refined palm olein is not expected to cause significant impact to Malaysian refiners as they have already established other downstream markets for their refined crude palm oil (CPO) exports.
To recap, India has lifted a six-year old price base freeze, basing the import duty of 7.5 per cent on palm olein on a fixed price of US$484 (RM1,524) per tonne; the move would effectively double import taxes on refined palm olein at current market prices.
RHB Research Institute Sdn Bhd (RHB Research) noted in a research note, “With the lifting of the freeze, import duties of imported refined palm oil will be based on the current market price of around US$1,050 (RM3,308) per tonne, effectively making the imports costlier by about 3.9 per cent based on current prices.
“It would make refined palm oil imports from Indonesia more costly and help protect domestic refiners. Indonesian refiners are likely to have to cut back on their production while finding a substitute market for their refined products.
“This move could likely just result in India switching back to buying more CPO instead of refined CPO, which would essentially put the Indian refiners back in business.
“Currently, we understand India is the largest importer of Indonesian refined palm oil, which means that the impact of this move will be felt more by Indonesian refiners versus Malaysian refiners.
“On the Malaysian side, we believe this should not have too much of an impact, given that Malaysian refiners would already have had established downstream markets to sell their refined CPO to besides India.
“The impact is likely to be felt more by the standalone refiners with no upstream or downstream support,” the research house said as it maintained its CPO price assumptions of RM3,100 per tonne for 2012, RM2,900 per tonne for 2013 and RM3,000 per tonne for 2014.
In a telephone conversation with The Borneo Post, an analyst from RHB Research revealed that the price assumptions did not take into consideration any significant impact from inclement weather (such as El Nino) which could potentially curb fresh fruit bunch harvest.
The analyst pointed out that ‘weather abnormalities’ up to four of five months would constitute a major factor and justify it as a risk criterion per se, as opposed to just one or two months of such conditions.
The other risk factors noted were a significant change in crude oil price trend; change in emphasis on implementing global bio-fuel mandates and trans-fat policies; significant changes in trade policies of vegetable oil importing or exporting countries and a sharper-than-expected global economic slowdown.
Choosing Sime Darby Bhd as RHB Research’s top pick with a fair value of RM10.75 per share, the analyst told The Borneo Post that the decision was based on valuation attractiveness as the group’s plantation division had a target price earnings ratio of 15 times for 2013.