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Palm oil market fundamentals 'encouraging', says MP Evans, as futures jump

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MP Evans, unveiling a return to first-half profit, flagged “encouraging” palm oil supply fundamentals, even as futures in the vegetable oil jumped to their highest finish since January.

 

The plantation group – which is listed in London, but operates in Indonesia – said that it was “confident that the fundamentals of the palm oil market continue to be encouraging”, supported in the long term by increased demand for what is a “basic foodstuff” at a time of constrained output prospects.

 

“Insufficient levels of replanting in Malaysia and a reduction in new Indonesian planting are likely to curb growth in production,” the group said.

 

‘Very determined’

Shorter-term, MP Evans highlighted limits to output from the labour squeeze which has hampered plantations in Malaysia, which rely largely on foreign labour, besides the hangover from 2019 dryness which has crimped yields in parts of Indonesia.

 

“In 2020, there was always expected to be a reduction in the production growth in palm oil. That is even stronger than had been anticipated,” said Tristan Price, the MP Evans chief executive.

 

Meanwhile, on demand, he said that the key Asian markets, notably China and India, “seem to be coming back quite well”.

 

And on biodiesel, for which palm oil is a key feedstock, while “things may not come back perhaps as strongly as was hoped” in the transport market overall, Mr Price highlighted Indonesia’s commitment to B30 – a 30% of the biofuel in transport diesel – with plants for B40 next year.

 

“Indonesia has been very determined in its rolling out of B30 biodiesel programme. There are plenty of signs that the government continues to hold with that,” he told Agrimoney.

 

Prices gain

Indonesia, the top palm oil producer and exporter, was revealed last week to be mulling an increase in its levies on shipments to boost funds for biodiesel plants, financing the gap between production costs of the biofuel and oil-based diesel.

 

The comments came as benchmark Kuala Lumpur palm oil futures for November gained 2.8% to close at 2,892 ringgit a tonne, their highest finish in more than seven months.

 

“The forward markets for CPO [crude palm oil] anticipate further price increases before the end of the year and a price holding firm into 2021,” MP Evans said, with Kuala Lumpur futures holding above 2,800 ringgit a tonne up to the March 2021 lot.

 

In China, Dalian palm oil futures for January gained 2.3% to 5,984 yuan a tonne, a fresh contract closing high.

 

Profits leap

MP Evans unveiled earnings of $3.67m for the first half of 2020, compared with a loss of $1.43m a year before, an improvement based both on higher production and prices of palm oil.

 

The group lifted its output by 31%, as it bought in extra fruit from outside mills to maximise the use, and cost efficiency, of its milling capacity, besides increasing its own output thanks to improved agronomic standards and to replanted area reaching maturity.

 

The Covid-19 pandemic “has had little effect” on operations of the group, which likes other Indonesian operators relies on local labour, and which has seen a “single digit” number of coronavirus cases amongst its workers.

 

MP Evans said that it is aiming for a total palm fruit harvest of more than 1m tonnes next year, rising above 1.4m tonnes by 2029, as replantings continue to come onstream, besides an increase in bought-in crop too.

 

Meanwhile, with costs holding steady, at a per-tonne-of-product level, operating profits soared near-sixfold to $6.04m.

 

Market reaction

In London, shares in the group, which held its interim dividend at 5.00p per share, stood 3.6% higher at 580p in lunchtime trading.

 

Broker FinnCap maintained a price target of 1000p on the shares, which it said reflected a valuation of $18.000 per hectare of plantation, “in line with the best operators and historic M&A” in the sector.

 

MP Evans had reported “strong growth”, FinnCapp said, although said that “gross margins are lagging our expectations”, a reflection of the production mix from the groups’ various plantations.

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