Impact on changing tax policies on palm oil by the global players

Recent changes in tax policies by Indonesian, Indian and Chinese governments on Palm Oil imports may have an impact on Sri Lankan exports to those countries with increasing competition, according to industry analysts.

China and India lowered its import duty on Crude Palm Oil and Indonesia has increased export duty on Palm Oil, recently. “India has cut import duty on crude palm oil to 20% from 45% with effect from 20th March 2008 to reduce inflation in the country before the general election to be held in May 2009. Most of Sri Lanka’s Palm Oil production is exported to India tax free under the free trade agreement (however it is immaterial for oil palm giants to consider Sri Lanka as a competitor),” Srimal Liyanage, Analyst Lanka Securities (PVT) Limited said.

He noted that Indonesia has raised its export duty on Crude Palm Oil to retain its production for the domestic consumption to reduce inflation. Liyanage noted that if major Palm Oil producers and consumers follow the said strategies it will create a positive scenario on Sri Lankan companies.

Crude oil prices surged to a record peak of US$111 per barrel in March 2008 due to supply concerns and growing demand pressure mainly from China, Brazil, India and other developing countries. “Shortfall of supply was further enhanced by the interruption in production which arose due to damaged oil refineries as a result of increasing violence in the major oil producing countries,” Liyanage said.

He said that the depreciating dollar, political instability and intensifying conflicts in the Middle East caused in widening the production shortage. Further the winter season has further worsened the crisis by augmenting the demand due to more utilization of energy and disruption to the production process in refineries.

“With the looming energy crisis which is predicted to be intensified within the next 30-40 years, the global demand for alternative energy sources has resulted in many bio-fuels being identified as an alternative for fossil fuels,” Liyanage noted. Consequently, the fluctuations in Crude Oil prices would directly reflect in the prices of petroleum by-products such as synthetic rubber. With the increase in prices of synthetic rubber, the demand for natural rubber is likely to increase due to the substitution effect resulting from economic market forces. Furthermore it is also expected to reflect positively on Palm Oil prices with increasing demand for Bio-fuel.