Plantation Sector - India increases import duty on refined palm oil Overweight

Bloomberg reported that India has increased the import duty on refined palm oil from 7.5% to 10%.
-  We are not surprised by this development as palm refiners in India have been lobbying for a higher import duty since mid-2013.
-  At that time, the refiners had proposed an import duty of 12.5% on refined palm oil. The Indian government has given in to the proposal of a higher import duty but at a rate of 10%.
-  Due to the low tax differential between crude and refined palm oil, buyers in India had preferred to import refined palm oil directly instead of buying them from the refiners.
-  It was reported that palm refiners in India were operating at low utilisation rates of only 30%. Companies operating palm refineries in India include Wilmar Adani and Ruchi Soya Industries.
-  We believe that the increase in import duty would not significantly affect the demand for palm oil.
-  India would still be buying palm oil from Indonesia or Malaysia except that there could be some switching from refined palm oil to palm oil in crude form.
-  Currently, the import duty on crude palm oil is 2.5%. The tax differential between crude and refined palm oil would increase to 7.5 percentage points due to the higher import duty on refined palm oil versus 5 percentage points previously.
-  India’s imports of palm oil from Malaysia fell by 9.6% from January to November 2013 versus the same period in 2012. In December 2013, India bought 36.9% fewer palm oil compared with November.
-  India accounted for 12.7% of Malaysia’s palm oil exports in the eleven months of 2013.
-  We have an OVERWEIGHT stance on the plantation sector. We have BUYs on IOI Corporation and Sime Darby.