India’s Tax Hike Concerns Weigh on Palm Oil Futures

Palm oil prices are facing downward pressure for the third consecutive day, weighed down by the prospect of higher import taxes in India, the world’s largest vegetable oil buyer. This potential policy shift is overshadowing concerns about a weaker supply outlook from top producer Indonesia.

The price of palm oil futures for November delivery on the Bursa Malaysia Derivatives Exchange decreased by 0.28% to 3,909 ringgit ($904.23) per metric ton on Thursday. This decline is largely attributed to comments from Indian government sources on Wednesday, indicating the country is considering raising import taxes on vegetable oils. This measure is intended to safeguard domestic farmers who are facing difficulties due to decreased prices for oilseeds.

According to Lingam Supramaniam, director at Selangor-based brokerage Pelindung Bestari, the potential tax hike is a major concern for the palm oil market. He explains that it could dampen demand and significantly reduce overseas purchases of palm oil by India. This, coupled with the competitive pricing of other vegetable oils and a strengthening ringgit, is driving the downward trend in palm oil prices.

Supporting the bearish sentiment is the recent decline in Malaysian palm oil product exports. According to data from Intertek Testing Services and AmSpec Agri Malaysia, palm oil exports from Malaysia decreased by 14.1% to 14.9% in the first 25 days of August compared to the previous month. Although the rate of decline has slowed down in the second half of August, the overall trend suggests that demand for palm oil may be decreasing.

Palm oil prices are also influenced by movements in related vegetable oils like soybean oil. Dalian’s most-active soyoil contract witnessed a slight increase of 0.03%, while its palm oil contract experienced a steeper decline of 0.7%. On the other hand, soyoil prices on the Chicago Board of Trade rose by 0.69%. These price fluctuations highlight the interconnectedness of the global vegetable oil market, where palm oil competes for a share alongside other oils.

The Malaysian ringgit, the currency used for palm oil trade, has also played a role in the price decline. A stronger ringgit makes palm oil less attractive for foreign currency holders, as it translates to a higher cost of purchase. The ringgit’s appreciation by 0.16% against the dollar on Thursday further weakens the appeal of palm oil in the global market.

Reuters technical analyst Wang Tao suggests that palm oil prices may enter a rangebound trading pattern between 3,819 ringgit to 3,864 ringgit per metric ton. This prediction is based on the failure of palm oil to break resistance at 3,966 ringgit and its movement along a falling trendline.

While the potential tax hike in India raises concerns about demand, Indonesia, the world’s top producer, presents a mixed picture on the supply side. Data from the Indonesia Palm Oil Association shows a significant increase in June palm oil exports compared to May. However, these exports still fell short of year-on-year figures. This suggests that while production may not be at peak levels, it’s not experiencing a drastic decline either.

Despite the recent export figures, some market participants remain cautiously optimistic about future palm oil prices. Mitesh Saiya, a trading manager at Mumbai-based trading firm Kantilal Laxmichand & Co., believes that expectations of lower Indonesian palm oil production due to unfavorable weather conditions and aging trees could keep market sentiment bullish in the long run. Additionally, Indonesia’s plans to increase its biodiesel mandate in 2025 are likely to limit export availability, potentially supporting global palm oil prices down the line.

However, this bullish outlook is countered by the potential tax hike in India and the ongoing adjustment of Indonesia’s palm oil export tax policy to improve competitiveness in a weak global demand environment.

Conclusion

The palm oil market is currently facing a complex interplay of factors, including the threat of higher import taxes in India, weakening supply from Indonesia, global economic conditions, consumer preferences, government policies, technological advancements, geopolitical events, and currency fluctuations. While the short-term trend appears bearish, the long-term outlook will depend on the evolution of these factors and their combined impact on demand and supply.

As the palm oil market continues to evolve, it is essential to stay informed about the latest developments and consider the broader context to make informed investment decisions.

The image added is for representation purposes only