The Hindu Business Line : Indian importers default on palm oil contracts

With a sharp fall in domestic prices as a result of softening international rates and waiver of duty by the Indian government, the importers find themselves in an awkward position.

G. Chandrashekhar

Mumbai, April 10 Even as the stand-off between select big boys of the edible oil trade (major sellers) and a large number of small buyers in the local markets of Mumbai, Kolkata and South India continues, comes the news of large-scale default by Indian importers following a decline in international prices.

Importers who had purchased crude palm oil at prices as high as $1,400 a tonne CIF sometime in February are wriggling out of the obligation as the market has undergone a sharp correction of up to $300 a tonne. One of the reasons attributable to purchases at such fancy prices was the expectation of a continuing bull run; but that was not to be.

According to a trade estimate, crude palm oil contracts totalling 250,000 tonnes are in a state of suspended animation. Overseas suppliers are livid that importers here are trying to opt out of the obligation. Most of the contracts are with suppliers from Indonesia. The default is sure to damage the fair image of India, according to market observers. Some shipments from Indonesia destined for India have reportedly been diverted to Pakistan because Indian importers have refused to meet their obligation.

Indian importers are already carrying sizeable stocks that were accumulated when prices were high. With a sharp fall in domestic prices as a result of softening international rates and waiver of duty by the Indian government, the importers find themselves in an awkward position.

The domestic offtake has also turned sluggish because of what is seen as the intransigent attitude of some large operators who are unwilling to amicably settle commitments that were made before the duty revision took place.

Reports from different parts of the country point to one or two major players with high stakes pressurising local dealers to take delivery of high priced goods even when the market has actually fallen. “We are in no position to accede to the dadagiri (bullying tactics) of big boys,” lamented a local dealer on the condition of anonymity.

The mess in the domestic vegetable oil market is unhealthy. Dominance by a few large firms is seen distorting the market, rather than advance stakeholder interest. In a distorted market, the real benefit of government action - zero-duty on crude oils - may not actually and fully reach the intended beneficiaries, that is, the poor consumers.

If the government is serious about delivery of real benefit to the aam aadmi, there is a strong need to regulate the vegetable oil trade, asserted a seasoned player.

“A handful of large refiners dominate this market, call the shots and make enormous amounts of profits. Their stranglehold on the market can be broken only if traders are encouraged to import refined oils that can be readily marketed,” pointed out a trade intermediary.

Currently, there is a 7.5 per cent customs duty on refined oils, which discourages traders from importing refined oils.

If the duty is removed or reduced to less than 5 per cent, more refined oils will flow into the country and help reduce volatility and contain prices. While refiners will continue to import crude oils at zero duty, traders too can participate in import business by bringing in refined oils which will result in stable but reasonable margins for all participants. The position can be reviewed sometime in September /October when the next kharif oilseeds crop gets ready for harvest.

Another effective method to insulate poor consumers from volatile market conditions is to revive the supply of edible oil through public distribution system. The oil must be priced at a subsidised rate. Leakages should be plugged with more effective vigilance.

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