SPURT in Edible Oil Trading as Refining Becomes Uneconomical - India Ratings

Mumbai, July 8, 2013: India Ratings & Research (Ind-Ra) maintains a negative outlook on the Indian edible oil sector for H213. The agency says a reduction in spreads between imported refined palm oil and crude palm oil (CPO) which is domestically refined has made refining unviable and boosted trading activities.

The spread has contracted to 1%-2% since October 2012 from around 9%-10% earlier due to a change in palm oil duty structure in exporting countries and imposition of import duty on CPO.

Ind-Ra expects refiners to experience lower capacity utilisation and volumes on increased competition from smaller traders with efficient cost structures. A combination of these is expected to dent operating profitability and return on capital employed for most edible oil companies.

In May 2013, the proportion of refined palm oil as proportion of overall palm imports surged to an all-time high of 42% from the earlier range of 12%-16%. Domestic refiners are now operating at 30%-35% capacity utilisation levels as against around 50% earlier. Players with capex plans on the anvil may choose to forgo them for the time being. On the other hand, capacities being commissioned in the interim may be underutilised.

The agency expects the proposal to hike an import duty to 12.5% (against the existing 7.7%) on landed cost of imported refined palm oil would once again encourage refining activities in the country. The proposal is currently under consideration by the government.

As indicated in Ind-Ra’s 2013 edible oil outlook report dated 25 January 2013, prices of major edible oils (CPO and crude soybean oil (CSO)) have declined. Given the existing stocks-to-consumption ratio, pricing pressures for CPO would continue and those for CSO would be arrested.

A revival of global consumption demand would reduce the current global inventory glut causing the prices of such agricultural commodities to recover and could lead to the outlook being revised to stable. However, this is unlikely to happen in the next 12 months.

(Source- Manager – Corporate Communications and Investor Relations, India Ratings & Research - A Fitch Group Company.)