India is the world’s biggest importer of palm oil. Interestingly, over the last one year, while imports of crude palm oil has been on a decline, that of refined palm oil has been rising sharply. Export taxes by major producers like Indonesia and Malaysia have a lot to do with this anomaly as does India’s custom duties. Is this the right time to jump into imports of RBD Pamolein? The Dollar Business examines.

BY Anishaa Kumar | May Issue 2017 | The Dollar business

If you are one of those health-conscious people who use palm oil for their daily cooking needs, chances are, you have been buying oil produced in either Indonesia or Malaysia. Yes, you have been a consumer of imported palm oil all this while. And even if buying locally produced palm oil was your want, it’d be rather hard to fulfil it. The reason is simple – in the last few years, Indian producers of palm oil have not been able to catch up with the growing domestic demand for the product.

Data from US Department of Agriculture reveals that the domestic consumption of palm oil in India has increased from 7,000 metric tonne (MT) in CY1964 to a humongous 10.20 million metric tonne (MMT) in CY2016. In fact, India’s consumption of plam oil increased 10.8% just between CY2015 and CY2016. To add to that, of all the edible oils that are consumed in the country, palm oil constitutes a major share – especially refined bleached and deodorised palmolein oil (RBD palmolein oil). And, guess what! Experts say that the demand for this commodity is only going to go one way from here – upwards! Looks like a good business to get into? The Dollar Business is glad to have triggered your curiosity. And if you’re thinking whether it’s worth investing in the imports business of palm oil, let us tell you that all facts lead to the conclusion that India cannot do without importing palm oil in one form or the other.

GROWING POPULARITY

According to a recent report by Pune-based Grand View Research, the Indian palm oil market size will reach $13.1 billion by 2025. “Rapid urbanisation and changing lifestyles backed by increasing disposable income in India have influenced consumption trends of consumers,” states the report. Interestingly, market researchers and economists, all have spoken many a time about India’s humongous appetite for consumption. In fact, India is already by far the largest importer of palm oil in the world – in CY2016 India’s imports were 19.97% of the world’s total imports of palm oil.

So, what makes India its biggest importer? And why experts believe that imports of palm oil will only grow going forward? Well, there are many factors at play – one, India’s hard summer is harmful for the palm plant which effects yield drastically; two, palm trees consume too much of water; three, there isn’t enough land for cultivation; four, India lacks infrastructure, expertise and modern technology. Well, this list could go on forever. Further, while India’s population continue to rise, consumption shows no signs of slowing down. Result: the demand for palm oil is bound to grow in the foreseeable future. And with domestic production not being able to keep up with the rising demand, importing palm oil remains the only option.

Shailesh Singh, Director, Risk Management and Commercial Sales, Cargill (India), says, “Millions rely on palm oil to feed their families, especially in countries with a growing population, like India. Further, the benefits of palm oil are being slowly realised as it can also be used in many solid fat formulations without the need for hydrogenation.

When used in this fashion, it does not contain trans fatty acid and that makes it a healthy oil. Also, it does not contain any cholesterol and is a good source of vitamin E.” This indicates that the popularity of this edible oil will keep growing.

Not many choices

RBD palmolein, the variety of palm oil that India has been increasingly importing over the last few years, is currently only being sourced from Indonesia and Malaysia, with Indonesia accounting for about 80% of India’s total imports of the product. While India imported RBD palmolein worth $1.58 billion in FY2016, the import value of the product stood at $1.78 billion in FY2017 (till January). What’s more? Between FY2010 and FY2016, India’s imports of RBD palmolein grew by over 55%.

Even when it comes to crude palm oil, it’s again Indonesia and Malaysia – and in very small quantities Honduras, Papua New Guinea, Philippines, Guatemala and Colombia – that have been feeding India’s humongous appetite for the product. While Indonesia contributes to about 59% of India’s imports of crude palm oil, Malaysia contributes 40%.

One fact that’s worth noting though is that India’s imports of crude palm oil have been declining over the last few years – from $5.4 billion in FY2015 to $4.2 billion in FY2016, and to $3.2 billion in FY2017 (April-January period). While in value terms crude palm oil is still being imported more than RBD palmolein, the growth trajectories of the two sure point to the fact that RBD palmolein is a better bet for importers, at least for the foreseeable future.

And meanwhile if you were wondering what makes Malaysia and Indonesia two preferred sources of India’s palm oil imports, you need to know that the two countries together account for about 85% of the world exports of palm oil.

Importer’s Market

We all know that the business of agri-commodities does come with its fair share of challenges, and not the least of which is monsoon. According to latest government estimates, the domestic production of cash crops is expected to be higher this year because of favourable monsoon. Estimates suggest that the domestic production of palm oil would be up 8% this year, reaching 271.98 MT as compared to 251.57 MT in the previous year. But, what goes in favour of importers is the fact that this is still a tiny fraction of India’s demand for the product. Agrees Sanjiv Sawla, Chairman of Indian Oilseeds & Produce Exporters Association (IOPEPC), as he tells The Dollar Business that the projected higher domestic production and its impact on imports of edible oil and oilseeds must be looked at from a more holistic way. “The production may be increasing, but at the same time the consumption is also rising. So, to meet the deficit, imports will continue to grow,” says Sawla.

In fact, our domestic production can be a threat to imports only if the government provides adequate encouragement to farmers, which has been missing till date. S. N. Jhunjhunwala, Managing Director, JVL Agro Industries Ltd., comments, “There is some cultivation happening in southern part of India, but it is almost negligible. While availability of land is a major issue, the climate in India too isn’t favourable for palm cultivation. But if the government initiates palm plantation on coastal areas, it may have an impact on the imports.” However, even if the government decides to wake up to the call, India will have to wait a while before it reaps the fruits.

Of Duties & Taxes

Interestingly, in September 2016, the government reduced import duties on both crude palm oil and refined palm oil by five percentage points to 7.5% and 15%, respectively. And with the reduction in import duty, imports of RBD palmolein has emerged as an attractive option to many importers. Naturally, domestic refiners who import crude palm oil are not pleased with the deduction in duty on RBD palmolein. “Import duty on crude palm oil is 7.5% and duty on refined palm oil is 15%. If the difference remains so small, our domestic refineries will suffer,” explains Jhunjhunwala.

What’s more? Both Malaysia and Indonesia, to provide a boost to their domestic edible palm oil processing industry, have too levied taxes on exports of crude palm oil. And this is the reason why imports of RDB palmolein has suddenly become a more profitable business than imports of crude palm oil.

While the export duty on crude palm oil in Malaysia ranges between 4.5% and 8.5%, it’s $18 per tonne in Indonesia (as of April 2017). However, Fadhil Hasan, Executive Director of Indonesian Palm Oil Association (better known as GAPKI), believes that the industry will not be impacted no matter what type of palm oil is imported by India.

“I am aware that there have been problems because of the imposition of export taxes on crude palm oil. But, I do not think that impediments will impact our palm oil exports as India continues to need palm oil and Indonesia offers competitive prices. We understand that India would want to import more crude palm oil than RBD palmolein because the industrial refineries in India need crude palm oil,” says Hasan.

A volume Game

The profit margin on imports of RBD palmolein, as per importers, is in the range of 3-4%. But since this is a volume game, the overall returns are high. “In the business of edible oil imports, traders can garner higher returns only if they get into volume game,” says Chitresh Aggarwal, Director of B. M. Oils Pvt. Ltd., a New Delhi-based importer of edible oils. Jhunjhunwala echos a similar sentiment and says that the key to high profits is in volume. However, at the same time, he feels that a reduction in import duty of crude palm oil will benefit the industry more. “At present, India imports about 15 MMT of edible oils every year, out of which about 9 MMT is palm oil. We are hoping that the duty difference is agreed upon and then people will import more of crude oil, reduce dependency on imports RBD palm oil and help the local industry grow,” adds Jhunjhunwala.

Domestic producers have been requesting the government to increase the differential between crude and
refined palm oil import duties to support local refineries.

In need of help?

It’s not that the government has not been doing its bit to increase domestic production of palm oil. In fact, recently, on April 12, 2017, the central government announced relaxation of land ceiling limit for oil palm cultivation under National Mission on Oilseeds and Oil Palm (NMOOP). The programme was until now catering to farmers with farm lands of not more than 25 hectares. However, under the updated scheme, benefits have been extended to farm lands of more than 25 hectares as well to attract corporate bodies towards oil palm cultivation and help them derive maximum benefit of 100% FDI in the palm oil sector.

India imports 15 MMT of edible oils every year, of which 9 MMT is palm oil.

All this seems good for domestic producers, but experts are sceptical about how soon this will bear fruit. Sairam Chaganti, CEO of Vishakaptnam-based Beont Trading says, “To set up plantations like Malaysia and for them to produce enough oil India would take at least 10-12 years.” Meanwhile, the domestic demand for palm oil is expected to continue to rise as it is one of the cheapest oils available in the market.

Future bright

Considering all this, the future definitely looks bright for the importers of RBD palmolein. “Imports of palm oil will continue at a steady pace because there is a huge shortage of edible oils in India. If we increase domestic production of edible oils by at least 20%, then it will be a different story altogether. No doubt we have mustard and soya oil, but since consumption is really high in India the demand can be met only through imports of palm oil,” says Jhunjhunwala.

Industry experts believe that India might try hard, but its domestic production of palm oil will never be enough to satiate an ever-increasing demand. Not at least in the ftoreseeable future. Interestingly, National Mission on Oilseeds and Oil Palm has also been reinvented time and again without making much of a difference to oilseed production. This obviously means music to ears for palm oil importers. While production in India could be an option, importing RBD palmolein from either Malaysia and Indonesia and selling in Indian market makes more sense at the moment.

What’s more? With demand for palm oil expected to move northwards in India, margins are bound to expand. Sounds lucrative, doesn’t it?