KUALA LUMPUR, Jan 2 — New Delhi’s latest tax revision has made palm oil more competitive against the alternatives such as sunflower oil and soybean oil, which have the narrowest spread in 10 years that will boost refined palm oil exports to India in the coming months, Public Investment Bank said.

As part of a bilateral agreement, India’s Ministry of Finance cut import duties on crude palm oil and refined palm oil from South-east Asian countries effective yesterday. The duty on CPO was lowered to 37.5 per cent from 40 per cent while the tax on refined CPO was cut to 45 per cent from 50 per cent.

"The narrower duty differential between Crude Palm Oil (CPO) and refined CPO to 7.5 per cent from 10 per cent will likely see Indian buyers switching their demand from CPO to refined CPO, namely palm olein,” it said.

Currently, refined palm oil imports in India account for 18.5 per cent of consumption and are expected to see a boost in the coming months, it said in its research note today.

"Supported by the duty disparity between CPO and refined palm oil products following the resumption of export duties in Malaysia, coupled with the latest tax move from India, Malaysian palm oil refiners are set to enjoy better margins than its counterparts,” it noted.

 Malaysian palm oil’s market share in India is also expected to jump from the current level of 49.8 per cent due to this, it said.

"The favourable move should help drive down Malaysian palm oil inventories and provide support to the current strong CPO prices,” said the bank, which is maintaining its bullish stance on the plantation outlook with a CPO price assumption of RM2,600 per tonne for this year.

Meanwhile, Kenanga in its research note on the plantation sector entitled "The Worst is Over, Better Days Ahead” upgraded the sector to "overweight” with a higher price target of RM2,700 per tonne in 2020.

"We believe that the worst is over for the plantation sector as demand-supply dynamics for CPO is in favour of a price upside due to tight supply as well as growing demand, and planters are expected to register significant sequential earnings improvement on the back of higher CPO prices,” it said.

Besides demand from India after the reduction in tax, the dry weather’s impact on CPO production, which typically lags by six to 12 months, has already begun, it noted.

"Based on data from the Malaysian Palm Oil Board (MPOB), we have started to see a double-digit decline in November CPO production (-14.4 per cent month-on-month), while according to the Malaysian Palm Oil Association (MPOA), CPO production from December 1 to 20, 2019 fell 16.4 per cent month-on-month, which is steeper than our expectation of eight per cent month-on-month,” it said.

Alongside lower application of fertiliser and a slowdown in new plantings to manage costs during the depressed CPO price environment in 2018 to mid-2019, Kenanga expects the production decline to continue into 2020.

"Overall, we continue to expect demand to outstrip supply in the first quarter of 2020, leading to depleting stockpiles, which should sustain CPO prices,” it said.

It said biodiesel mandates both in Indonesia and Malaysia will also support the commodity.

"This, in essence, convinces us that demand for palm oil will remain robust and with production already slowing down, it builds a case for demand growth to outpace supply growth,” it added. — Bernama