The largest global palm oil exporter, Indonesia, on 28th Apr’22 halted exports of crude palm oil in order to curtail soaring domestic cooking oil prices. The move shook edible oil markets which were already rattled by Russia-Ukraine conflict and soaring global food prices. However, only just days back, Indonesia has allowed companies to start exporting palm oil only if exporting companies fulfill prerequisite Domestic Market Obligation (DMO) where domestic demand is estimated at 10mn tons or ~30% of total production as per Indonesian economic minister.

·         Therefore, in light of the above events, Govt. of Pakistan is considering removing 2% additional customs duty on the import of Palm Oil from the rest of the world except Indonesia. The said measure is likely to benefit listed edible oil manufacturers, UNITY and POML. However, the removal of 2% duty is only being introduced for a limited time period i.e., 10 days.

·         As per our estimates, removal of 2% duty would reduce landed palm oil price by PkR4.8K-5K/ton and would eventually translate into an annualized EPS gain of PkR0.2/0.42/sh for UNITY, assuming 50/100% import substitution from Malaysia and no pass on.  We have assumed 15% of Pakistan’s import substitution of Indonesian palm oil with Malaysian palm oil, increasing Malaysian share in total imports to 30-35% from 15-20%. Globally, Malaysia is the 2nd largest producer of palm oil with estimated 19.8mn tons of production in FY22 – 25% of global production. Additionally, Pakistan could also consider Thailand – third-largest producer with expected 3.3mn tons of production in FY22 (4% of global production) – as the next best alternative after Malaysia. We see Thailand as a suitable substitute over players like Colombia, Nigeria, and Guatemala due to its closer proximity with Pakistan, ongoing supply chain complexities, and volatile freight rates.

·         However, due to mounting inflationary pressure, Govt. may force edible oil manufactures to pass on the cost benefit to end consumers.

·         To note, under the current structure, custom duty on import of edible oil from the rest of the world except Indonesia and Malaysia is currently levied at PkR10,080/ton while PkR9,230/ton is levied on import from Indonesia or Malaysia. A 2% additional customs duty is charged on top of the aforementioned custom duties.

Courtesy – AKD Research