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Palm oil prices 'to go higher' says REA, even as it unveils 'very substantial' loss


Palm oil prices are “likely to go higher”, REA Holdings said, even as the plantations-to-coal group blamed weak values for "very substantial losses", and deferred again dividends on its preference shares.


The London-listed group, which operates in the Indonesian province of East Kalimantan, said that palm oil prices – which have already recovered to $580 per tonne in Rotterdam as of Wednesday from $480 per tonne in July – are “expected to increase further”.


The forecast reflected an assessment that for vegetable oils overall “the rate of growth in demand… is now exceeding the rate of growth in supply”.


This dynamic is “expected to continue” as countries increase mandates for biodiesel, which is made from vegetable oils, with Indonesia and Malaysia, the top palm-producing countries, leading this drive, but the US reported this week to be proposing some increases for 2020 too.


Meanwhile, the palm oil market in particular faces limits to production growth, with “increasing constraints on the expansion of oil palm hectarage as a result of sustainability concerns”.


‘Likely to go higher’

“CPO [crude palm oil] stocks are being absorbed and this is already being reflected in an improvement in the CPO price,” REA Holdings said.


“The group agrees with the view of professional commentators that CPO prices are likely to go higher.”


A number of leading analysts, including Dorab Mistry and Oil World’s Thomas Mielke, were widely reported in July forecasting a recovery in palm oil prices ahead, although in many cases to levels which have now been reached.


The recovery in crude oil prices, besides some talk of Chinese and Indian demand, has given an extra boost to some market forecasts.


‘Particularly challenging’

REA’s comments came as it unveiled a jump to $24.45m in its loss for the first half of 2019, compared with a $635,000 loss a year before.


While revenues rose by 17.5% to $56.58m, that reflected a boost to volumes from the sale of stocks built up last year thanks to a logistical hiccup.


Average crude palm oil selling prices, at $430 per tonne, fell by 22% year on year, with the group achieving $590 per tonne for its crude palm kernel oil (CPKO), a drop of 40% year on year.


“Poor CPO and CPKO prices meant that revenues were some $15.9m lower than they would have been had prices been at the same levels, themselves depressed, as in the corresponding period of 2018,” the group said, terming the period “particularly challenging”.


Dividends deferred

REA said that “against this background”, it was cutting costs, and had delayed, “pending a sustained recovery in the CPO price”, the resumption of a planting programme on undeveloped land.


Furthermore, the group, “conscious of the fact that very substantial losses were incurred in the first half of the year,” said it would continue to defer payment of the June dividend on its preference shares, and likely delay the December payment too.


Payouts would resume “once it has become clear that the recovery in CPO prices will continue and can reasonably be expected to be sustained”.


REA forecast that in fact the January-to-June loss “will represent the nadir of the group’s fortunes”, with cost savings, improved palm oil prices and seasonally higher production “to result in a material improvement in the results” for the second half of 2019.


Market reaction

REA Holdings shares eased 1.3% to 158p in lunchtime deals in London.


At broker VSA Capital, Ed Hugo said he was “surprised” that the shares - having rebounded by 75% from a 16-year low set in mid-July – had not given back more of these gains, given what he termed “another poor set of results” for the group.


However, he added that “I would imagine that the second half of the year will be better for them”, given the improved palm oil price, which he highlighted still remained below the long-term average of about $800 per tonne in Rotterdam.


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