Indonesia palm oil sector rattled by India tax

Fri Jul 20, 2012 2:20am EDT

* Indonesia eyes similar tax changes in Malaysia

* India move seen positive for CPO prices

* Monsoon may pressure India's hand on palm imports

JAKARTA, July 20 (Reuters) - Indonesia, the world's biggest palm oil grower, is likely to see a drop in exports after top consumer India effectively doubled import taxes on refined products of the edible oil, in a move that could also push rival Malaysia to overhaul its taxes.

India, which imports more than half of its total vegetable oil consumption of about 16 million tonnes per year, ended a six-year old freeze on the base import price of refined palm olein on Thursday.

The move followed lobbying from Indian refiners after Indonesia slashed export duties for processed oil last October, as it looked to kick-start its domestic downstream industries.

"India's response will be disadvantageous both for Indian consumers and Indonesian producers," said Fadhil Hasan, executive director at the Indonesian Palm Oil Association.

Hasan said New Delhi's policy response came after Indonesia's tax cut had made Indian refineries uncompetitive.

"The same action will be done by Malaysia," he added.

Media reports in Malaysia have already indicated that the Southeast Asian nation intends to reform its crude palm oil (CPO) export duties to support refiners affected by Indonesia's export tax structure.

Malaysia and Indonesia account for about 90 percent of global palm oil output of around 50 million tonnes

Palm oil, the world's most traded and consumed edible oil, is used mainly as an ingredient in food such as biscuits and ice cream, or as a biofuel.

Production in Indonesia is expected to be 23-25 million tonnes this year, with India, China and Europe the main buyers.

"The change could be better for Malaysian CPO exporters because India now will buy more CPO (for refining) and Indonesia has high duty so India will look to Malaysia," said a Singapore-based trader with a foreign commodities house.

A Reuters survey of 30 firms operating in Indonesia - from the world's biggest listed palm oil firm Wilmar to conglomerate Unilever - shows Jakarta's tax change has prompted plans to nearly double refining capacity to 43 million tonnes of palm oil at a cost of more than $2.5 billion .

The Indonesian policy change nearly doubled India's refined palm olein imports to 1.2 million tonnes for the first eight months of the current year from November in comparison with the year-ago period.

PRICE IMPACT

Palm traders said that crude palm oil prices could rise after India's move, while refined products in Indonesia fall.

"The Indonesian CPO price will eventually go higher and olein lower - so the spread could possibly narrow," said one Jakarta-based trader.

At 0358 GMT, the benchmark October palm oil futures contract on the Bursa Malaysia Derivatives Exchange was steady at 3,045 Malaysian ringgit ($970).

Malaysian refined palm olein for October delivery was trading at a $36 premium to the benchmark crude palm oil futures on Thursday.

A second trader with an Indonesian refiner, which ships palm oil to India, said he did not expect Indonesia to change its policy or react to India's tax shift.

"We need to wait for the dust to settle down," he added. "There will be a slight drop in Indian demand for refined palm oil in the short term.

"But lets not forget India has a huge population (and) the monsoon is not exactly great at this point." ($1 = 3.1540 Malaysian ringgits) (Reporting by Yayat Supriatna and Michael Taylor in JAKARTA, Niluksi Koswanage in KUALA LUMPUR, Chew Yee Kiat in SINGAPORE; Editing by Ed Davies)

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