ECONOMYNEXT – Sri Lanka firms producing a range of foods and personal care items would be hit by a palm oil ban, in addition to publicly traded companies growing the plant which would have be uprooted under state orders, an equities research report said.
Sri Lanka produces c. 8 percent of it annual palm oil requirement and imports the remaining 92 percent, estimated at 200,000 tonnes from Indonesia and Malaysia, CAL an investment bank said in a research note to clients.
“Due to Sri Lanka’s palm oil sourcing mix, the implementation of a complete importation ban will be complex due to the high demand for palm oil spanning across multiple industries and the inability of local production to fulfil the existing demand,” CAL Research said.
“A hike in palm oil prices will lead to an immediate contraction in margins, as entities will be unable to shift the incremental cost onto the consumer.”
Many domestic industries relied on palm oil due its relatively lower cost.
Publicly traded Hemas Holdings used palm oil to make soaps and shampoos. Ceylon Cold Stores used palm oil in iced confectionary.
Ironically other companies that are affected are firms that vigorously opposed free trade pacts.
Other firms that could be hit included Unilever, Maliban, Ceylon Buiscuits and Prima, the firm said.
Meanwhile CAL said alternatives included rapeseed oil (Canola) and coconut oil.
However Sri Lanka only produced 27,000 metric tonnes of coconut oil.
Meanwhile about 11,000 hectares of palm oil planted by listed companies who jumped on an ‘import substitution’ tax arbitrage scheme have been ordered to be uprooted as part of the anti-palm oil measures.
Sri Lanka’s current administration which favours import substitution to ‘save’ foreign exchange, which is in short supply due to
Sri Lanka has raised import taxes on edible oils about a decade ago to satisfy a powerful coconut land-owner lobby who have old-established connections with Sri Lanka’s elected ruling class.
Usually business running import substitution rackets have strong connections with the elected ruling class, but palm oil companies got a free ride without actually having to establish links, analysts who are familiar with the issue say.
While other “import substitution” firms are arbitraging taxes that would have otherwise gone to the Treasury. (Colombo/Apr07/2021)