Cooking Oil Refiners Seek Levies as Plants Idle: Corporate India

Cooking oil refiners in India are seeking higher tariffs to curb cheaper imports that have eroded margins of companies in the world’s second-largest consumer of the commodity.

India must increase the levy to 12.5 percent from 7.5 percent, Atul Chaturvedi, chief executive officer at Adani Wilmar Ltd., said in an interview. Overseas purchases of refined, bleached and deodorized palm olein surged 36 percent to a record in the 10 months to August as a drop in palm prices in Malaysia made it lucrative to import processed products.

Refiners including Adani and Ruchi Soya Industries Ltd., India’s largest cooking oil processor, say they are operating at 30 percent of capacity as imports flood the market. Rising overseas purchases are hurting Prime Minister Manmohan Singh’s efforts to rein in an unprecedented current account deficit that sent the rupee to a record low last month.

At the rate now for capacity utilization “you are as good as closed,” said Chaturvedi. “If the refineries are shut, you are going to have lot of job losses.”

Demands for higher levies may increase as international prices slump further. Palm, the world’s most-used cooking oil, may drop to the lowest level since 2009 by January as global supplies of edible oils expand and crude oil weakens, Dorab Mistry, director at Godrej International Ltd., said yesterday.

Prices Retreat

Futures will probably retreat to 2,000 ringgit ($629) a metric ton in Kuala Lumpur if Brazil and Argentina, the largest soybean growers after the U.S., harvest bigger crops and Brent crude drops below $100 a barrel, Mistry told an industry conference in Mumbai.

The contract for delivery in December lost 0.7 percent to 2,300 ringgit on the Bursa Malaysia Derivatives on Sept. 20, the lowest price at close for the most-active contract since Aug. 14. Futures dropped 2 percent last week.

“If you don’t change levies now, you are not going to have any margins,” Paul Bloemendal, commercial director at Ruchi Soya, said in an interview yesterday. “With no margins you are not going to get investments.”

India will decide on the import tariff in 10 days, Food Minister K.V. Thomas said on Sept. 20. The government in April 2008 cut the tax to 7.5 percent. India will also have to take into account the effect of higher taxes on inflation, which accelerated to the fastest pace in six months in August.

Singh has moved to attract foreign investment and increased gold-import taxes to try and pare a record current-account gap to about $70 billion in 2013-2014. The government has raised the bullion levy three times this year and linked imports to re-exports to moderate consumption.

‘Dire’ Situation

The rupee has dropped 12 percent this year. That hasn’t deterred imports of the vegetable oil as at the current rate of duties processed cooking oil in India costs $810 a ton, while crude palm oil can be purchased at $805 a ton increasing the demand for refined products.

“The current situation is very dire for the industry,” said Isha Trivedi, a Mumbai-based analyst at PhillipCapital India Pvt. “It doesn’t make sense to import crude oil if the price difference between crude and refined oil is not much. Even if India raises the refined tax marginally, imports will continue to take place but at a slower pace.”

Cooking oils represented 61 percent of Ruchi Soya’s revenue in the year ended March 31. The company’s earnings margin before interest, taxes, depreciation and amortization narrowed to 3.4 percent in the period from 4.04 percent a year earlier.

Palm Stockpiles

Ruchi Soya’s shares have dropped 41 percent this year making it the worst performing stock in the Bloomberg Industries GL Sugar & Grain, Oilseed Competitive Index. The stock rose 1.1 percent to 38.2 rupees at 9:59 a.m. in Mumbai.

World palm stockpiles will surge 17 percent to a record 9.2 million tons by the end of 2013-2014 as demand expands 4.5 percent, the least in 12 years, the U.S. Department of Agriculture estimates.

India’s imports of vegetable oils may increase 3.8 percent to 11 million tons in the season starting Nov. 1, from 10.6 million tons estimated for this season, said Mistry. Consumption will gain 4.9 percent to 18.1 million tons, he said.

“Some of my refiner friends tell me they make money on refining sunflower oil in 12 out of 12 months,” said Godrej’s Mistry. “They make money in refining soybean oil 10 out of 12 months. They make money refining palm oil in 3 out of 12 months.”

Before it's here, it's on the Bloomberg Terminal.