KUALA LUMPUR (March 19): Spot crude palm oil (CPO) prices could give up some of their gains after the government announced yesterday that oil palm estates and mills can operate regularly under the movement control order, said CGS-CIMB.

In a note to investors, the research house’s Ivy Ng and Nagulan Ravi said while spot CPO prices did rise by 1.8% or RM42 a tonne to RM2,322 a tonne on Tuesday on concerns of harvest interruptions, prices should drop again as the market will likely focus on possible demand destruction resulting from the Covid-19 outbreak.

The pandemic has prompted countries to curb the movements of its people in a bid to stem its spread, which could in turn reduce the consumption of palm oil.

Additionally, plunging crude oil prices to below US$30 a barrel are likely to cut the usage of palm oil for biodiesel purposes over time.

“We maintain our average CPO price forecast of RM2,300 per tonne for 2020 and 'neutral' rating on the sector,” they noted.

They also observed minimal impact on plantation companies’ earnings after their estates and mills were allowed to continue operations, noting that it was unsurprising given that palm oil is a component of cooking oil, which is an essential food item.

“Furthermore, independent and organised smallholders own approx. 28.4% of total planted oil palm estates in Malaysia of around 5.9 million ha. As such, the potential impact on smallholders’ daily income will be significant if they are not allowed to harvest fresh fruit bunches (FFB) from their palm oil estates and sell to the mills during the RMO (restriction movement order) period,” said Ng and Ravi.

In sector note yesterday, the research team had estimated that had palm oil estates and mills been not allowed to continue operations under the movement control order, a revenue loss of RM1.6 billion could be on the cards, as well as stocks declining to 1 million tonnes at the end of the month, from 1.68 million tonnes previously.

This would have led to tighter-than-expected supply and benefitted other palm oil-producing countries such as Indonesia and Thailand.

The Malaysian Palm Oil Association (MPOA) via a circular to its members yesterday announced that palm oil plantations and mills can continue to open for business, on the condition they maintain strict measures to ensure that the spread of the Covid-19 is mitigated.

Minister of Primary Industries and Commodities (MPIC) Datuk Dr Mohd Khairuddin Aman Razali announced in a statement today that the government is allowing the harvesting of FFB by plantation companies and smallholders, FFB processing at palm oil mills, and the refining CPO into cooking oil to fulfil the needs of the local market.