KUALA LUMPUR (Nikkei Markets) -- Malaysia expects India's latest move to raise import tax on refined palm oil to erode its market share although exports of crude palm oil to the South Asian nation would likely remain steady.
"We still have the opportunity to sell crude palm oil because crude palm oil is duty-free and it will continue to be imported by the Indian refiners," said Kalyana Sundram, chief executive of the Malaysian Palm Oil Council, a state-run agency mandated to promote the edible oil.
The comments come a day after India increased customs duty on Malaysian "refined bleached deodorized palm oil" and "refined bleached deodorized palm olein" by 5% for 180 days to safeguard the domestic industry.
The action follows a recommendation last month by the Indian commerce ministry to raise the customs duty by 5% on the items that were being imported from Malaysia, following a surge in shipments owing to a bilateral trade treaty between the two countries.
"This increase in import at low prices has led to idling of significant capacities of the domestic industry during the period of investigation," according to a statement of the finance ministry's revenue department.
Before Wednesday's decision, India levied a 40% duty on crude palm oil and 50% on refined palm oil. However, refined palm oil imports from Malaysia were being taxed at a lower rate of 45% due to the India-Malaysia Comprehensive Economic Cooperation Agreement.
Shares of plantation companies fell on Bursa Malaysia. The most-traded crude palm oil contract for November fell as much as 1.1% to 2,163 ringgit per ton on Bursa Malaysia Derivatives.
Analysts said the levy will erode competitiveness of Malaysian palm oil, though potential dip in sales to India, the world's top importer of the vegetable oil, could be partially cushioned by higher sales to China.
India's decision will deal a "big blow" to Malaysian refiners, said Singapore-based Palm Oil Analytics. The move is also "bearish" for palm oil prices though there could be a surge in exports from Malaysia after the higher import tax regime expires on Mar. 2, 2020, it said.
For Sime Darby Plantation, the potential impact would "not be really significant" as the company's shipments to India have been a combination of Indonesian and Malaysian origins, said Mohd Haris Mohd Arshad, who heads the company's downstream business.
"If there's going to be a duty change which makes Malaysian palm olein uncompetitive, then most likely we will be shipping out of Indonesia," Haris said during the company's post-earnings briefing on Aug. 30.
Sime Darby Plantation, the world's largest palm oil producer by acreage, exports about one million tons of palm oil products to India every year.
Still, the increase in levy could balloon stockpile in Malaysia as India switches to purchases from Indonesia, said RHB Research Institute Analyst Hoe Lee Leng. Last year, Malaysia shipped some 2.51 million tons of palm oil to India.
"With Malaysia crude palm oil stock ending higher, sentiment wise, it would be negative, as that's the key statistic that people look at for the prices," she said. "We still have the benefit of China, where we should still be able to see the demand coming through from the trade war," she added.
Shares of Sime Darby Plantation ended 0.6% lower at 4.82 ringgit apiece, while the benchmark FTSE Bursa Malaysia KLCI closed barely changed.
-- Gho Chee Yuan and Sarah Nadlin Rohim