As CPO prices plunge, millers halt palm oil production

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According to a Reuters report, Malaysian crude palm oil (CPO) prices have seen their biggest one-month decline in more than 13 years this month, dropping by some 22 per cent from a high of RM6,632 (US$1,506.25) a tonne to RM4,922 on Monday.— Bernama photo

KUCHING (June 28):

Palm oil millers here have decided to temporarily halt production following a dramatic plunge in prices of crude palm oil.

According to a Reuters report, Malaysian crude palm oil (CPO) prices have seen their biggest one-month decline in more than 13 years this month, dropping by some 22 per cent from a high of RM6,632 (US$1,506.25) a tonne to RM4,922 on Monday.

This has erased most of this year’s gains for palm oil millers. A substantial number of millers are affected, especially independent millers sourcing from smallholders.

According to senior official from a miller’s association, Malaysian millers purchase palm fruit bunches based on the monthly average CPO price – currently about RM6,200 – but sell the extracted oil based on the daily market price.

“No mills can afford to buy fresh fruit bunches at these prices,” said Malaysian Palm Oil Millers Association (POMA) Northern president Steven Yow, in the Reuters report.

To note, Malaysia’s benchmark CPO futures rallied to records earlier this year thanks to several factors such as a global edible oil supply squeeze caused by a labour shortage, the Russia-Ukraine conflict and an export ban by top palm producer Indonesia.

However, the contract fell when Indonesia ended that ban and sought to boost exports, which caused more market volatility.

At current prices, the mills in Malaysia stand to lose an estimated RM150,000 for every 100 tonnes of CPO produced, Yow said, adding that buyers are currently offering around RM4,700 for CPO.

Yow said millers that have delivered on their contracted sales have stopped receiving fresh fruit bunches from suppliers until prices normalise. He added that the stoppages may range from one day to one week.

“This kind of situation has never happened before in the last 35 years,” he said to Reuters.

Analyst Ong Chee Ting from Maybank Investment Bank Bhd (Maybank IB Research) affirmed that the recent sharp decline in CPO price “can be rather disruptive to business”.

“There is also rising risk of default by buyers, or buyers seeking to defer some shipments of higher priced palm oil locked in earlier,” she said in her analysis yesterday. “Positively, the current CPO ASP is still above the industry’s average operating cost of production estimated for FY22 at less than RM2,500 per tonne.”

“But the situation in Indonesia is worrisome (although temporary) as domestic net CPO ASP was last quoted at 8,000 rupiah per kg (or RMYR2,374 per tonne as of June 24).”

Ong noted that Indonesia’s CPO price fast approaching cost of production.

“The industry’s average all-in operating cost of production (to customer) for FY21 is estimated at RM1,900 per tonne. Even after factoring higher fertiliser cost pressures in FY22, we estimate the industry’s operating cost to be less than RM2,500,” she said.

“Given current global CPO price of above RM4,000 per tonne, there are still good margins to be made but mostly for Malaysia-based growers as Indonesia-based growers are presently hurt by the burdensome export taxes (and domestic market obligation) and slow issuance of export permits.

“The latest transacted price of 8,000 rupiah per kg is fast approaching breakeven costs of some companies. Nonetheless, we believe Indonesia’s low net CPO prices is temporary.

“Under normal circumstances, the net CPO price in Indonesia would have been RM1,000 per tonne higher than current level.”