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Oil On the Boil – Causing Huge Volatility, India

The year 2022 has been a year of difference. Coming out of COVID-19’s shadow, we stepped into the new year with trepidation but hoping for a new dawn. Let us see how the edible oil scene has played out in the first six months of the calendar year.

The first half of 2022 has seen an almost static demand for Indian vegetable oil. When compared to the previous year, imports have risen by 2%. The share of palm oil in total vegetable imports saw a sharp decline to 54% from 63%, for the corresponding year. This was due to high prices of palm oil, coupled with the narrowing spreads of soft oil, the root cause being a shift towards it, the flip-flopping in Indonesian policies and its ban of palm oil exports.

Domestic compulsions caused Indonesia to throttle exports. As the country crept after COVID-19 restrictions, big feasts started to be held. With demand, the domestic price of palm oil started rising. People in Indonesia started protesting. Indonesian exports then came into focus. The country accounts for almost two-thirds of global oil exports. Questions were asked on the high local prices when production is high: Is there a need to export when local population is suffering? Protesters started getting more vocal. In late April, to quell local protests, President Joko Widodo announced a ban on palm oil exports. The glut of oil that was now available, helped arrest price rise in Indonesia. As expected, the prices sharply declined, and the focus now shifted from a ban to the “Export Acceleration Programme” as stocks now appear to be burdensome in Indonesia.

The ban by Indonesia on palm oil exports roiled the world markets. Countries in the Indian sub-continent like India, Pakistan and Bangladesh relied heavily on vegetable oil mainly imported from Indonesia for their cooking needs, with the oil previously. The sudden ban had a massive impact in the countries as they scouted for rival oils like soya and also palm oils from other countries such as Thailand and Papua New Guinea. The market share of Malaysian palm oil too had gone up in the months of April and May 2022.

As Indonesia is one of India’s major sources of palm oil imports, the first half of 2022 saw a perceptible decline of 12%, when compared on a year-to-year basis. From 44% in the first half of 2021, the share of imports plummeted to 32%.

To add to the turmoil, in February 2022 Russia started a military conflict in Ukraine, throwing the world into more uncertainties, as Ukraine is amongst the world’s largest sunflower oil exporters. For India, nearly 80% of sunflower oil imports originated from Ukraine. However, the drop was mercifully a marginal 4% for India as they were swift to procure it from alternative markets like Russia and Argentina.

It should be noted that the recent fall in prices has discounted palm oil to soft oils by USD250-500/T. It has also increased palm oil import parity to more than USD100/T due to high price inventory pressure and losses thereby. This is expected to increase the share of palm oil imports as we enter peak import months in India.

The Import scenario:

The first half of the year 2022 saw the total vegetable oil imports move from 6.21 million MT in the corresponding previous year to 6.36 million MT, a 2% rise. The first quarter of the year saw 16% higher imports on a year-to-year (YOY) basis. However, with the disruptions caused by the Russia-Ukraine war, imports plummeted by whopping 10% when compared to the same period the previous year.

Drilling down on the figures of palm oil imports, at 3.45 million MT, a YOY decrease of 12% has happened. Buoyed by higher soybean oil imports, soft oil imports in H12022 swelled to 2.9 million MT, an increase of 28% YOY. The disparity in imports and narrow spreads that palm oil commands over rivals has resulted in palm oil demand declining in the Indian market.

The narrowing of spreads between soy oil and palm oil has seen a perceptible shift in demand from palm oil to soy oil. The basket shares of soft oil, which was 37% in the Jan-June 2021 period, shot up to 46% in the corresponding period this year.

  Jan-June 2022 Jan-June 2021 Change % Change
SFO 964,854 1,003,855 -39,001 -4%
SBO 1,944,359 1,276,903 667,456 52%
SOFT OILS 2,909,213 2,280,758 628,455 28%
CPO 2,173,719 3,680,618 -1,506,899 -41%
RBDPL 1,018,674 16,476 1,002,198 6083%
OTHERS 258,601 231,441 27,160 12%
PALM OIL 3,450,994 3,928,535 -477,541 -12%
TOTAL 6,360,207 6,209,293 150,914 2%
Source: SEA of India
All figures in Tonnes

Shedding Light on Domestic Production:

It is estimated that the rise in oilseeds production in 2021-22 would reach 7%, rising to 38.5 million MT from 35.95 million MT in the previous year. Farmers were encouraged to cultivate more due to good prices in the last two years. This was due to the COVID-19-related disruptions that affected the global supply chain. The result was a rise in vegetable oil production for 2021-22, to 10.3 million MT, against 9.78 million MT the previous year—a 5% increase.

When compared to the earnings derived from other cash crops, the prices of oilseeds have been on the higher side and are expected to continue in the present year. This will continue to encourage farmers to continue opting for oil seed crops in 2022-23.

Crop 2020-21 2021-22 (Estimates)
Groundnut 10.244 10.087
Castor seed 1.647 1.506
Sesamum 0.817 0.857
Niger seed 0.042 0.036
Soybean 12.61 13.828
Sunflower 0.228 0.255
Rapeseed & Mustard 10.21 11.754
Linseed 0.111 0.13
Safflower 0.036 0.044
Total Nine Oilseeds 35.946 38.498
Source: Ministry of Agriculture and Farmers welfare, Govt of India
All figures in Tonnes

Focus on Import Duties:

On finding out that cheap imported oil was a threat to domestic oilseeds producers, the government stepped in and slapped high import duties on edible oil imports. In 2019, the import duty on CPI was 44%. However, with the advent of COVID-19, logistics took a tumble. Supply chains were massively disrupted. Coupled with other macro-economic factors, this led to a steep rise in domestic vegetable oil prices. The government was forced to step in and reduce the import duties levied on vegetable oils.

The end of 2021 saw the effective import duty on CPO dive to 8.25% and other crude oils to 13.75%. The last six months has seen a reduction in the import duty of CPO. However, for the remaining vegetable oils the rate is similar to that of December 2021. From 13 February 2022, in a bid to cool down spiralling cooking oil prices and to support domestic processors, the government reduced agri-cess on CPO to 5%. This effectively brought the import duty down to 5.5% from 8.25%.

Import Duty on Edible oils w.e.f 13th Feb 2022
Products Import duty Agri. Cess Social Welfare Cess Effective Duty
Crude Palm Oil 5.00% 10% 5.50%
RBD Palm Olein 12.50% 10% 13.75%
RBD Palm Oil 12.50% 10% 13.75%
Crude Soybean Oil 5.00% 10% 5.50%
Crude Sunflower Oil 5.00% 10% 5.50%

How the Tariff Rate Quota (TRQ) Queered the Pitch:

In order to control the rising inflation, the Indian government has made the decision to allow duty free import of crude soy oil and crude sunflower oil of 2 million MT each for the next two financial years, effective from 25 May 2022. This would help import soy oil at lower prices.

The Directorate General of Foreign Trade (DGFT) was directed to collect applications and allot TRQ quantities based on the refining capacity of companies and their sales during the last three financial years. The objective was to allocate quota for the actual processors of vegetable oil and to exclude traders.

The DGFT and the Ministry of Consumer Affairs, Food and Public Distribution set the allotment under TRQ by keeping a cap of 200 KMT per refiner. However, Solvent Extractors Association of India has pointed out the flawed logic in arriving at these quotas. They advised the government to review the allocation, as its current iteration has anomalies which would not help transfer the TRQ benefit to consumers.

As the TRQ has a limit of 200 KMT to a company, it is limiting the allocation of the quota on the basis of their last three years’ performance. Many leading companies that refine soybean oil at capacities between 200 KMT to 1000 KMT have now been allocated only 200 KMT, which would compel the actual soy and sunflower oil refiners to import the rest of the quantity (above 200 KMT), resulting in them having to pay the full duty and higher prices.

It was pointed out that smaller players could take advantage of the higher duty-free import quotas that they have received against their previous sales, and may not pass on the full benefit to the end consumers as larger players will have to import at full duty after they exhaust their TRQ quantity, rendering the TRQ ineffective.

Previously, industry participants have also asked to overturn the decision on cutting down the import duty on soft oils in a meeting held on 22 June, as falling prices of vegetable oils would ease inflationary pressures on consumers. Any further decline in oil prices would discourage oilseed farmers ahead of sowing season.

Forecasting the Supply and Demand scene:

Domestic edible oil production in India during the next quarter (June to Sept 2022) is projected to be at 2.12 million MT. Imports of edible oil are projected to reach 3.87 million MT (monthly average of 1.29 million MT). The festive season demand during the June-Sept quarter contributes to the fresh supply of 5.9 million MT. Along with the existing stock of 1.61 million MT, the total supply for the Q3 2022 comes to 7.6 million MT.

With the impending festival season, demand during the next quarter is expected to be higher than normal. The next two quarters could see the highest offtake. This would boost domestic demand of edible oils to 6.08 million MT in the June to September quarter, as compared to 5.7 million MT during the last quarter.

Quarterly Edible Oil Balance Sheet of India- JAS’22
Particulars In MMT
Opening stocks 1.61
Production 2.12
Imports 3.87
Total Supply 7.60
Exports 0.00
Domestic Consumption 6.08
End Stocks 1.52

Source: Transgraph Estimates

The world has been lurching from one crisis to another. For over two years, the world cowered under the fear of COVID-19. As the world was limping towards normalcy, Russia invaded Ukraine. It was expected to be a short, sharp war with order expected to be restored soon. But nearly six months down the line, the conflict is still continuing. With Ukraine now having the capability of striking at the supply lines of the Russian war machine, we could be in for a long haul.

And if all this is not enough, the sabre rattling by China over the Taiwan issue is threatening to further aggravate matters.

A combination of all these factors is going to continuously make edible oils be on the boil, and with both high and low prices attracting constant policy gyrations. In this context, the stable Malaysian export policy has been well appreciated by both the Indian players and also some circles in the Indian Government.

Prepared by: Bhavna Shah

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