Oil On the Boil – Causing Huge Volatility, India

The year 2022, has been a year with a difference. Coming out of the shadow of Covid-19, 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 year 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 with soft oils that caused a shift towards soft oil, the root cause being the flip-flop of Indonesian policies and mainly the ban of  oil palm oil exports. 

Domestic compulsions caused Indonesia to throttle exports. As Indonesia crept after Covid-19 restrictions, big feasts started getting planned. With demand, the domestic price of palm oil started rising. People started protesting. Indonesian exports came into focus. As Indonesia accounts for almost two thirds of global oil exports, questions started getting asked in Indonesia why they are saddled with high prices when production is high? Is there a need to export when local population is suffering? Protesters started getting more vocal. To quell local protests, in late April, President Joko Widodo announced a ban on palm oil exports. The glut of oil that was now available helped arrest price rise in Indonesia and as expected, the prices sharply declined, and the focus now shifted from ban to “Export Acceleration Programme” as stocks now appear to be burdonesome 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 for their cooking needs. This used to be imported mainly from Indonesia. The sudden ban had a massive impact in many such countries as they scouted for rival oils like soya and also other palm origins like Thailand and Papa Newguinea and the market share of MPO had gone up  during the months of April and May 22.

With Indonesia being one of our major sources of imports, the first half year 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 conflict in Ukraine throwing the world into a tizzy. Ukraine was amongst the largest exporter of sunflower oil. For us nearly 80% of SFO imports originated from Ukraine. However, for India, the drop was mercifully a marginal 4% as we were swift to procure it from other markets like Russia and Argentina.

It should be noted, the recent fall in price has discounted palm oil to soft  oils by $250-500 /T. It has also increased palm oil import parity to more than $100/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 total vegetable oil imports moved from 6.21 MMT in the corresponding previous year to 6.36 MMT. This was a 2% rise.  The first quarter of the year saw 16% higher imports on a year-to-year basis. However, with the disruptions caused by the Russia-Ukraine war, imports plummeted by a whooping 10% when compared to the same period the previous year.

Drilling down on the figures of palm oil imports, at 3.45MMT, a YOY decrease of 12% has happened. Buoyed by higher soybean oil imports, soft oil imports in H1’2022 swelled to 2.9MMT, 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 21 period zoomed 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

Light on Domestic Production:

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

When compared to the earnings derived form other cash crops, the prices of oilseeds have been on the higher side and is 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 cheap imported oil was a threat for domestic oil seeds 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 toss. Supply chains were massively disrupted. Coupled with other macro-economic factors, this saw 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 reduction in the import duty of CPO. However, for the remaining vegetable oils the rate is similar to that of December 2021. From 13th February 2022, in a bid to cool down spiraling cooking oil prices and to support domestic processors, the government reduced agri-cess on CPO to 5%. This effectively brought the import duty 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, Indian government has taken a decision to allow duty free imports of crude soy oil and crude sun oil of 2MMT each for next two financial years, effective from 25th of May’22. This would help in importing soy oil at lower price.

The Directorate General of Foreign Trade (DGFT) was directed to collect applications and allot TRQ quantity based on the refining capacity of company and sales during the last 3 financial years. The objective was to allocate quota for the actual processors of vegetable oil and to exclude traders.

The DGFT and Ministry of consumer affairs, Food and Public distribution released the allotment under TRQ by keeping a cap of 200KMT per refiner. However, Solvent extractors association of India has pointed out the flawed logic in arriving at these quotas. It has been advised to the government to review the allocation, as current allocation has anomalies which would not transfer the TRQ benefit to consumer.

As the TRQ has a limit of 200 KMT to a company, it is limiting the allocation of quota basis last 3 years performance. Many leading companies refining Soybean oil above 200 KMT to 1000 KMT have been allocated only 200 KMT. This would compel the actual Soy and Sun oil refiners to import the rest of the quantity (above 200 KMT) paying full duty. This would result in their pricing to be higher.

It was pointed out smaller players could take advantage of higher duty-free import quota that they have received against their previous sales and may not pass on the full benefit to the end consumer as larger players will have to import at full duty after they exhaust TRQ quantity. This defeats the basic purpose of TRQ.

Previously, Industry participants have also asked to overturn the decision on cutting down the import duty on soft oil in meeting held on 22nd June, as falling vegetable oil prices would ease inflationary pressure on consumer.  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 next quarter (June to Sept’22) is projected to be at 2.12 MMT. Imports of edible oils are projected at 3.87 MMT (monthly average of 1.29 MMT). The festive season demand during the June-Sept quarter, contributing to the fresh supply of 5.9MMT. Along with existing stock of 1.61 MMT the total supply for the Q3 2022 comes to 7.6 MMT.

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 MMT in the June to September quarter compared to 5.7 MMT 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 is lurching from one crisis to another. For over two years, the world cowered under the blanket 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 continues to brew. With Ukraine now having the capability of striking at supply lines of the Russian war machine, we could be in for a long haul.

If that was not enough, the saber rattling by China over the Taiwan issue threatens to spiral out of control.

A combination of all these factors is going to see edible oil continue to be on the boil and looks like both high and low prices will continue to attract constant policy gyrations and, in this context, the stable Malaysian export policy has been well appreciated both by Indian players and also by some circles in Government of India.

Prepared by: Bhavna Shah 

*Disclaimer: This document has been prepared based on information from sources believed to be reliable but we do not make any representations as to its accuracy. This document is for information only and opinion expressed may be subject to change without notice and we will not accept any responsibility and shall not be held responsible for any loss or damage arising from or in respect of any use or misuse or reliance on the contents. We reserve our right to delete or edit any information on this site at any time at our absolute discretion without giving any prior notice.

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