Palm oil prices are surging, but this will only dent Indian imports as a spate of customs duty cuts and a strong rupee cushion the blow.
While some of the recent surge in global prices to record highs will feed through to domestic prices, with other edible oils also shooting up users have little alternative, but to pay up for what is a staple in Indian cooking.
“India’s demand for palm is likely to drop a bit, but only in the near term,” said Atul Chaturvedi, vice-president of Adani Exports Ltd.
Palm oil prices in Malaysia, the benchmark for the commodity in what is the world’s largest producer, have climbed to record highs this week on hopes that competitor Indonesia will raise export taxes, and due to concerns over depleting stocks. A remark made by a senior Union food ministry official that New Delhi, battling ballooning inflation, was planning a third round of duty cuts on vegetable oils in 2007, added fuel to futures prices.
India imports close to five million tonnes (mt) of vegetable oils annually—making it the world’s second largest buyer after China—just over half of which is palm oil.
Analysts said that some importers might hold back purchases in the hope that the market could see a correction after the strong rally, but they won’t cancel any deals.
“I do not see people switching to alternative oils. Alternative oils are also getting expensive,” Chaturvedi added.
Soya oil on the Chicago Board of Trade is also benefiting from surging demand for vegetable oils, and is currently hovering near a 23-year high.
India in April cut the palm oil import duty by 10 percentage points to 50%, to help counter high international prices. The current import duty on soya oil is 45%. The government lowered duties in January as well. In the 2007-08 budget, the government also abolished a 4% additional customs duty on edible oils.
“I personally feel there is no need for the government to panic as local prices are well under control,” B.V. Mehta, executive director of the Solvent Extractors’ Association, said.
Palm oil in the domestic market is currently quoted at around Rs440 per 10 kg, up 20-25% since January, traders said. And soya oil was quoted at around Rs490 a tonne.
Mehta said apart from palm duty cuts, the firming of the Indian rupee—which climbed to a nine-year high last week to 40.28 to the US dollar—had helped the importers absorb some of the price rise.
While Malaysian palm oil prices have gained 32% since the beginning of the year, the Indian rupee has risen 9% in the same period.
In addition, the tariff values or base prices used to calculate duties to be paid by importers, have not been revised for several months. The freeze in tariff values has helped to keep a lid on edible oil prices in India.
Mehta warned against further cuts in import duties, which he said would hurt farmers and pull down oilseed output.
“A further drop in oilseeds will be a cause of concern,” an analyst with Sharekhan brokerage said. “Farmers have already lost interest in cultivating oilseed because of a preference for growing wheat.”
India is likely to produce about 24mt of oilseeds in the crop year to November, against an output of 27.9mt last year, according to trade estimates. REUTERS