Mumbai, June 2 India imported excessive quantities of vegetable oil between November 2008 and April 2009 (first six months of the current oil year), far beyond its normal requirement. Of the 41 lakh tonnes (lt) import, palm group of oils alone accounted for 33 lt, the rest being 3.5 lt each of soya oil and sunoil.
It is common knowledge that such large-scale (and in hindsight largely unwarranted) purchase by India helped ease burdensome palm oil inventory and boosted palm oil prices to levels not justified by global fundamentals.
With a new government (actually, the old government in a new avatar) assuming office, traders are betting on the Finance Minister bringing imported oils under the tariff regime. They seem to believe that revenue considerations will force the Government to re-impose Customs duty; but they could be hugely disappointed.
Large-scale imports were prompted primarily by expectation that the Government would succumb to lobby pressure and actually impose a tariff. But nothing happened in the last four months.
Tackling food inflation
For the new government now, control of food inflation is top priority. It has turned defensive over high prices of fine cereals, sugar, pulses and cooking oil.
Ban on futures trading in sugar and decision not to lift export restrictions on wheat and rice (despite huge buffer stocks) clearly point to the official line of thinking. At this juncture, the Government cannot afford to push cooking oil prices up by imposing Customs duty. International market for vegetable oils has gained considerable strength since early April due to a combination of factors. Domestic market too has risen in tandem, making any talk of duty unjustified.
Slow offtake
Now, with the ongoing summer season (April-July) consumption of cooking oils has slowed down considerably. Slow offtake in the domestic market has got importers worried. It is estimated that close to 10 lt of various oils may be lying in storage in the country, valued at about Rs 3,500 crore. There is a huge exposure that importers are facing and with it goes a high level of price risk.
On the other hand, demand will revive from August onwards with the beginning of a series of festivals. Importers are likely to continue to make desperate attempts for imposition of duty in the coming weeks, at the time of Budget making; but the Government is most unlikely to relent.
Meanwhile, because of the burdensome stocks of imported oils and slow offtake, further imports till July are sure to slow down. If the southwest monsoon sets in and advances with full vigour over the next three to four weeks, there will be a sentimental change. Uncrushed oilseeds lying with mills will quickly come out for processing.
While India is in an over-bought position, there is reason to believe China too has built notable reserves of imported soyabean. As and when the USDA report on actual planted acreage under soyabean in the US comes out, it may hold some surprise. It is believed wet weather during April and even May has prompted shift of some acreage from corn to soyabean.
Palm has already entered the peak production season. With slowdown in purchases, especially by India over the next two months, there is possibility Malaysian inventory may not decline but actually expand, albeit marginally. Indonesia is of course a less known entity as far as market data are concerned.
So, the upside risks to global vegetable oil prices are rather limited, so is the downside potential. However, if there is a directional change, it is likely to be to the downside rather than to the upside.
Factoring in weather
Weather (especially El Nino) is of course a huge uncertainty. It can play havoc. Rising crude market (above $60 a barrel currently) is also supportive to the vegetable oil market.
Barring unforeseen developments, palm oil and soyabean oil prices may remain range-bound for about two months, with the possibility of a small downward correction of up to 10 per cent from current levels.
Early September, when the kharif crop prospects crystallise, will be an appropriate time for the Indian government to examine the case for customs duty on imported vegetable oils.
Source : Business Line