India. Lower import duty on crude palm oil may lead to the closure of nearly 25 refining units

30.07.2013

Nearly 25 crude palm oil refining units are facing the threat of closure because their refining business has come down sharply following the government's decision to impose a lower import duty on crude palm oil. The duty differential between imported crude palm oil and refined palm oil has now fallen to 5% from the earlier 7.5%.

These units had invested Rs 10,000 crore in creating a 15-million-tonne refinery capacity after the government introduced a duty difference between crude edible oils and refined oils in 1999 to encourage value addition in the country. The units are now incurring huge losses and under financial stress raising concerns for the 5 lakh people employed in the sector. Pradeep Chowdhary, managing director , Gemini Edibles, said: "More than 50% of the country's palm oil is refined in Andhra Pradesh. South Indians use palm oil for their daily consumption. As the duty differential between crude palm oil and refined palm oil has narrowed down, life has become increasingly difficult for refiners.

Some of the refining units will shortly become non-performing assets. We are incurring huge losses." Gemini Edibles has two units - one at Krishnapatnam and the other at Kakinada -- with a daily refining capacity of 11,000 tonne. The refining industry's business worsened after Indonesia and Malaysia, the two leading palm oil producers, took a series of steps which has resulted in better availability of refined palm oil at much lower prices. Malaysia has all along protected its refining industry by allowing crude palm oil export only under a quota. Now Indonesia has followed suit.

"Today, the Indian industry faces an existential threat thanks to the duty structure prevailing in India and the incentives given by major refined oil exporting countries like Indonesia and Malaysia to their domestic refineries," said BV Mehta, executive director, Solvent Extractors Association . Since October 2011, Indonesia has protected its domestic refiners in other ways as well.

The export tax on crude palm oil export is much higher than refined oil. The export duty rates are changed each month in line with the market prices of palm oil. The higher the palm oil prices, the higher will be the export duty and consequently higher will be the difference between the export tax on crude palm oil and refined palm oil. All this has a direct impact on the Indian domestic refined palm oil industry.

The differential between the crude palm oil and refined palmolein was $80- $100 per tonne earlier but now stands at only $ 3-5 per tonne. The result is that imported refined oil costs less than domestic refined oil. "The current scenario is grim. There is now a very real scenario that refiners would start defaulting on their loans and this in turn would saddle banks with increasing non-performing assets (NPAs). A refinery has already shut down while many others are struggling. This at a time when the NPAs of banks are already increasing due to an overall economic slowdown " said Mehta.


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