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New Britain backs firm outlook for palm oil prices

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New Britain Palm Oil added its voice to those foreseeing continued strength in palm oil prices, even as futures eased on Thursday on profit-taking after their "super bull" run in the last session.

The London-listed group, which operates in Papua New Guinea, highlighted an "improving palm oil pricing environment" it attributed both to supply and demand factors.

Palm oil use in making biodiesel – of which both Indonesia and Malaysia, the top palm producing country, are raising mandated rates of blending into forecourt diesel - is expected to "grow significantly".

"The outlook for palm oil demand remains robust with the strengthening of the global economy and mandatory biodiesel implementation by the world's two biggest palm oil producers bodes well for future pricing," said Antonio Monteiro De Castro, the New Britain Palm Oil chairman.

Production concerns

Meanwhile, production had last year suffered from tree stress, or in Mr de Castro's words "clear biological yield reduction induced by yield cycle factors", which many see being followed this year by dryness.

The Malaysian Palm Oil Association has, according to market talk, estimated palm production in Malaysia, the second ranked palm producer and exporter after Indonesia, falling 9% in the first 20 days of February.

And there are expectations of a continued decline, spurred by continued talk of an El Nino weather pattern setting in this year, although official meteorologists in the likes of Australia, Japan and the US continue to give outcome only a 50:50 chance.

"Dry spells in major palm producing countries such as Malaysia and Indonesia are likely to curb production," said Chee Tat, analyst at Phillip Futures, adding that "there are more signs pointing towards the arrival of El Nino this year", such as dryness in eastern Australia too.

'On steroids'

"The pricing environment [for palm oil] appears to be well supported," Mr de Castro said.

Nonetheless, palm oil futures for May eased back to 2,780 ringgit a tonne in Kuala Lumpur on Tuesday in a decline attributed profit-taking, after touching a 17-month high of 2,818 ringgit a tonne in the last session, and taking gains for February to 10.1%.

Palm oil was "on steroids" in the last session, Mr Chee said, while Malaysia's AmFutures called the performance a "super bull" run.

New Britain Palm Oil signalled that it had kept stable, at 121,000 tonnes, its forward sales of palm oil, so far in the calendar year despite the better market conditions, although locking in an average price of $927 a tonne, up 4.2% year on year.

Separately, Indonesia-based palm producer First Resources said that its palm oil production had risen 8.0%, year on year, last month to 182,384 tonnes.

'Extremely challenging'

The group's comments came as it unveiled underlying pre-tax profits down 79% to $17.3m for 2013, reflecting lower palm oil prices but also production setbacks thanks to yield stress and unusually heavy rains in Papua New Guinea early in the year.

The group processed 2.09m tonnes of palm fruit, down 8.2% year on year, with a lower oil extraction rate, of 22.2%, down 0.2 points year on year.

However, New Britain Palm Oil shares recovered early losses to stand up 3.7% at 345p in morning deals in London thanks to ideas that the improved palm oil price, plus a weaker Papua New Guinea currency and a better start to 2014 for production, had improved the group's prospects.

"Whilst the past two years have been extremely challenging…. measures taken in 2013 to reduce cash costs of production, together with the depreciation in the currency, sees the group very well placed to return to growth in the current year and improve operating margins," Mr De Castro said.

Broker reaction

In the City, VSA Capital said that while the results were "disappointing", this year "promises to be much better with underlying commodity strength, a lower cost base and improving operational performance".

The broker restated a "buy" rating on New Britain Palm Oil shares, with a price target of 488p.

"We would see any weakness today as an opportunity to buy into the stock at historically low levels," VSA analyst Edward Hugo said.

Panmure Gordon also restated a "buy" recommendation, saying that with 2014 "looking like being a much better year, upside pressure on our forecasts" for New Britain Palm oil profits, "we think this is a good opportunity to pick up shares".

Peel Hunt said that the shares "look cheap", but cautioned that their discount to the average industry valuation may linger until there is a resolution over Kulim, the group's major shareholder, which failed in an attempt to tighten its grip last year.


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