KUALA LUMPUR: A change of government policy in Indonesia may put further downward pressure on crude palm oil (CPO) prices.

       The Indonesian government had recently announced that it would raise the price cap for bulk cooking oil to 14,000 rupiah (RM4.11) per litre, from 11,500 rupiah (RM3.38) per litre previously, and provide subsidies, according to CGS-CIMB Research.

       The research house also noted that there has been a decision in Indonesia to scrap ceiling prices for branded cooking oil of 14,000 rupiah per litre for premium packaged cooking oil and 13,500 rupiah (RM3.97) per litre for second-tier quality oil.

       “We are of the view that if the recent moves by the Indonesian government succeed in restoring the supply of branded and bulk cooking oil in the domestic market, the government will discontinue the current domestic price obligation (DPO) and relax the domestic market obligation (DMO) as well as the export permit rule.

       “This is because the subsidy for cooking oil mechanism will replace the DPO requirement of selling CPO at below market prices to local cooking oil producers,” it said.

       CGS-CIMB Research also noted that the recent policies are meant to ensure ample supply of cooking oil in the market.

       The changes happened about a week after the Indonesia government decided on an increase in its DMO percentage effective March 10 to ensure affordable cooking oil for the local consumers, it said.

       This means that exporters would have to allocate 30% of their planned CPO shipment volume for local supply, which is an increase from 20% previously.

       This new DMO policy will be in place until the supply situation returns to normal, according to the research house.

       “The latest development in Indonesia is likely negative for Malaysian planters as international CPO prices could retrace if Indonesia’s export permit rules are relaxed.

       “The decision is positive for cooking oil producers in Indonesia as their profitability is restored with subsidy granted for non-branded cooking oil and they have the liberty to price branded cooking oil at market prices,” it said.

       The research house also said that this would be positive for the Indonesian planters and exporters as they will no longer be required to sell 30% of their palm oil production or exports at the 9,300 rupiah (RM2.73) per kg price which is 40% below current market price of 15,816 rupiah (RM4.65) per kg set by the government to obtain export permits for their palm products.

       “Also, if the cooking oil supplies are fully restored following the removal of the ceiling price on branded cooking oil, there will be fewer reasons to keep the export permit rule.

       “The change in policy could lead to higher export supplies from Indonesia in the coming weeks and this could weaken CPO prices in the international market,” it noted.

       Commenting on the recent fall in CPO prices, the research house said this was due to concerns over demand destruction amid high CPO prices and news of lockdowns in China.

       The correction in prices could also be due to profit-taking by traders amid declining crude oil prices with the progress in peace talks between Russia and Ukraine, and expectation of higher export supplies from Indonesia, it added.