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KUALA LUMPUR (2ND UPDATE) - Several palm oil refineries have slowed operations and some plan to halt output if a Malaysian military attack on an armed Filipino group on Borneo island drags on, potentially disrupting supply of the edible oil to China.
Malaysia's military launched a dawn attack on the group on Tuesday, trying to end a standoff after violence that killed at least 27 people and sparked fears of broader insecurity in Sabah -- the country's top oil palm growing state.
Any disruptions to supply could help buoy prices for the oil, although traders said that climbs would probably be limited as high stock levels in the country continue to drag.
Authorities imposed a curfew in the surrounding areas after the Filipino gunmen shot and killed police officers on Friday, forcing oil palm estates and refineries to curb operations.
These include Singapore's Wilmar International and Malaysia's KL Kepong and Kwantas Corp -- with a combined 1.8 million tonnes of processing capacity.
"The three companies owning these refineries are looking to cease operations if it becomes worse and there is a high chance it will happen," said a refinery official with direct knowledge of the matter.
Company officials declined to comment.
A Malaysian government minister said the military operations would not hurt the country's palm oil sector -- the world's second largest after Indonesia in terms of output
"What is happening in Sabah is not big enough to affect supply and demand in the palm oil industry," Commodities Minister Bernard Dompok told reporters in Kuala Lumpur.
"I do not think refiners are in anyway affected as they are mostly in town areas."
Much of the palm oil from Sabah is shipped to China -- the world's second largest consumer of the oil used mostly in cooking.
Benchmark Malaysian palm oil futures slipped on Tuesday in thin volumes after gains in the previous session lifted prices from near two-month lows. Traders said prices could recover a little on concerns over the possible supply disruptions in Sabah, which accounts for a quarter of national production.
Police roadblocks in the Lahad Datu area -- close to where the military operations are taking place, have slowed transportation of palm oil to mills, refineries and ports.
CIMB Investment Bank said in a note that Genting Plantations had suspended deliveries from two of its five mills to Lahad Datu.
The Filipino gunmen landed in a coastal village three weeks ago, staking a historic claim on Sabah. The village was surrounded by oil palm estates that supply the edible oil to Felda Global Ventures.
Malaysian security forces have cleared the surrounding plantations and villages of people since the first clash began on Friday.
"Our check with Felda Global Ventures revealed that it was unable to access 1,000 hectares of estates earlier but it is unclear if the area affected has expanded since Friday's clashes," CIMB said.
Felda Global Ventures President Sabri Ahmad declined to comment, saying security operations were still ongoing.
Traders said any interference in supply from Sabah might provide an opportunity to further draw down Malaysian palm oil stocks, which hovered near a record high in January.
"Prices will get support from this but not much. We are still struggling with high stocks in Malaysia," said a trader with a foreign commodities firm based in the Malaysian capital.