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Palm oil prices to 'at least' hold current levels, says REA


Palm oil prices should “at least” hold on to current levels, helped by a global production slowdown, REA Holdings said – even as it acknowledged that its own output had missed forecasts, sending shares lower.


The palm-to-coal group highlighted the “continuing growth in demand for vegetable oils with a fall-off in the rate of growth in supply” as a prop for prices of palm oil, which on the Kuala Lumpur futures market hit a three-year high of 3,150 ringgit a tonne in mid-January.


Prices retreated sharply late last month, on worries over dents to demand from China’s coronavirus outbreak, as well as knock-on effects of a Malaysian political spat with top importer India, although futures have staged an 8.0% rebound this week to end at 2,813 ringgit a tonne.


“Crude palm oil [CPO] stocks are expected to fall to a four-year low in 2019-20, and this is likely at least to support current price levels,” REA Holdings said.


Production pressures

The group - whose plantations are Indonesia, but is listed in London - flagged potential constraints to palm oil production ahead, saying that “the impact of reduced fertiliser applications by some producers in response to the CPO price weakness has yet to be felt.


“Also, many oil palm producers are reporting rainfall deficits in the second half of 2019 which may impact 2020 production.”


Oil World, the influential consultancy, last week forecast world palm oil output in 2019-20 overall falling by 1m tonnes year on year, a factor it said would see prices average at least $800 per tonne in the first half of calendar 2020.


Oil World reports the price, as of Wednesday, at $795.00 per tonne.


‘Short of target’

However, REA Holdings acknowledged that its own output had been constrained last year by a hangover from the strong 2018 harvest, with production of fresh palm fruit bunches, at 800,666 tonnes, coming in short of it expectations.


“An industry-wide decline in fresh fruit bunch production, as palms entered a resting phase following very high levels of cropping in 2018, meant that crops in 2019 fell short of the targeted 900,000 tonnes,” the group said.


Furthermore, it said its own plantations had suffered from some dryness, although terming “acceptable” the average of 3000 millimetres received last year across its estates.


“There were… some limited drier periods in the second half of 2019 and rainfall was unusually localised with not all areas receiving the same levels of rainfall.


“The effect of this on 2020 crops is difficult to predict,” REA said, although adding that “crop levels and yields are expected at least to be maintained at current levels, with extraction rates gradually improving” thanks to mill development efforts.


Dividend renewal

The palm oil market improvement, and hopes for a debt refinancing, prompted REA to say it intended to resume paying dividends on its preference shares, after missing 2019’s two half-year payouts.


Indeed, the group said it was planning to start catching up on the dividend arrears with a payment of 1.0% per share at the end of next month.


Nonetheless, REA’s ordinary shares, following the palm oil production miss, closed down 2.9% at 166p in London.


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