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New Britain reassures on sagging palm oil price

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New Britain Palm Oil sounded an upbeat note on palm oil price prospects even as futures in the vegetable oil dropped to a three month-low, and fears receded for weather damage to Indonesian production.

Nick Thompson, chief executive of the Papua New Guinea-based palm oil producer, said that demand for the vegetable oil was "robust", back by a strengthening world economy and higher consumption in Indonesia and Malaysia, the top producing countries, which have lifted the mandates for use of palm oil-based biodiesel.

Although acknowledging that production of rival vegetable oils, such as soyoil, "could surprise on the upside", there were a range of factors offering "strength for future palm oil pricing", he said.

These included the widening discount of palm oil to soyoil, which doubled to some $120 a tonne on international markets last month from $60 a tonne in April, dry weather early in 2014 in Indonesia and Malaysia, and the potential for more if the El Nino weather pattern kicks in.

These weather factors "could significantly reduce palm oil production from the world's two biggest producers", Mr Thompson said.

El Niño 'alert'

In fact, official Australian meteorologists on Tuesday said that an El Nino – which typically causes undue dryness in much of Asia, besides in the east of Australia itself – could kick in "as early as July".

Pacific water temperatures, which rise ahead of an El Nino, were running up to 6 degrees Celsius above normal below the surface, and proving "increasingly warm" at the surface, the Australian Bureau of Meteorology said.

"While El Niño in 2014 cannot be guaranteed, the likelihood of an event developing remains at least 70% and we are at El Niño 'alert' level."

Indonesian prospects

However, palm oil futures fell 0.6% to 2,568 ringgit a tonne in Kuala Lumpur nonetheless, the weakest close since early February, as industry figures downplayed the threat to Indonesian production – for now.

Derom Bangun, chairman of the Indonesian Palm Oil Board, stood by a forecast for Indonesian palm production of 29.5m tonnes, foreseeing a delayed reaction to output from an El Nino.

"If it happens this year, the impact will not be felt this year, but next year," Mr Bangun said.

Joko Supriyono, secretary general of the Indonesian Palm Oil Association, or Gapki, said Indonesian palm oil production now looked likely to show a "slight increase" over his forecast in January of 28m tonnes.

"I see in the Sumatra area it has started to rain ... and production is getting better this month," he said.

"Some forecasters tell us [production] this year may reach 30m tonnes."

Market reaction

Mr Thompson's comments came as the group revealed a sharp improvement in pre-tax profits to $21.4m for the first three months of the year, up from $4.8m a year before.

The rise reflected, besides improved palm oil prices, which remain well above levels a year ago, a jump of 10.3% to 618,880 tonnes in the amount of palm fruit processed, and cost savings measures introduced after last year's disappointing performance.

The data received a broadly warm response from brokers, including Shore Capital which restated a "buy" rating on New Britain Palm Oil shares, reflecting also "a more stable outlook for the palm oil price".

At VSA Capital, Edward Hugo, forecasting "continued strong palm oil pricing for 2014" also restated a "buy" rating on the stock, with a target price of 500p.

And Panmure Gordon's Graham Jones reiterated a "buy" rating with a target price of 580p, citing the discount the group's shares are trading at, at 7.5 times earnings before interest, tax, depreciation and amortisation (ebitda) compared with Indonesian rivals on 10.5 times and Malaysian peers at 12.3 times.

The shares stood 1.2% higher at 421p in lunchtime deals in London, having earlier matched a five-month high of 432p.


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