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Palm oil prices have 'solid' floor despite strong Indonesia output hopes - Sipef

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Palm oil prices will remain supported by demand from biodiesel plants in Indonesia, despite “positive” prospects for the vegetable oil there, Sipef said – while flagging an unusual setback to its own output.


The plantations group said that the new production year for Indonesian palm oil had “started in favourable conditions”, with most of its own operations in the country enjoying “rising volumes”


“General expectations for the first quarter remain positive,” Sipef said, in comments which came hours after the US Department of Agriculture bureau in Jakarta stuck by forecasts for Indonesian output of a “strong” 38.5m tonnes for 2017-18, on an October-to-September basis.


The output forecast, a rise of 2.5m tonnes year on year, was supported by the factors of “new mature area entering full production” and “expectations for above-trend yields due to favourable weather conditions”, the bureau said.


Biodiesel boost


Nonetheless, Sipef forecast that palm oil prices – which are little changed in the Kuala Lumpur futures market so far in 2018, while easing 1.9% in the key Rotterdam market – will hold their ground for now.


“We are positive that prices will remain steady, certainly for the first half of the year,” the group said.


The forecast reflected the boost to biodiesel demand prospects from improved oil prices, with Sipef saying that “the recent strong, but volatile, petro market, together with its underlying gasoil market, are certainly triggering higher mandated biodiesel volumes in Indonesia.


“We are getting very close to discretionary biodiesel blending to become economic sense in general.


“This has provided a very solid, but higher floor for palm oil,” although the group flagged “lower price expectations in the second half of the year”.


Gasoil vs palm oil


Earlier this week, VSA Capital flagged that the premium of palm oil to gasoil of about $80 a tonne, while above the $13 a tonne seen in late January “remains below the $100-a-tonne line, where non-mandated palm biodiesel typically starts to become economically viable again.


The London broker flagged that “domestic biodiesel consumption in Indonesia is key to medium and long-term price support for palm oil pricing”.


The USDA bureau in its briefing overnight stuck by a forecast for Indonesia’s industrial use of biodiesel rising by 150,000 tonnes year on year to 3.60m tonnes in 2017-18.


While highlighting Indonesian government plans “to extend the biodiesel mandate programme to non-public transit sectors, including mining,” the bureau noted potential hurdles to the plans.


“Questions persist regarding whether the sector can increase production and expand distribution, and whether sufficient funds will be available to subsidise an expansion in biodiesel use.”


‘Predominately male flowers’


Sipef’s comments came as it unveiled results for the October-to-December period showing an unusual hiccup at its Hargy operation in Papua New Guinea, where output at its own plantations had fallen 11.7% year on year, with the decline at 20% in output from smallholders it also relies on for supplies.


“Since September we have seen predominately male flowers in the plantation’s older plantings,” the group said, seeing this potentially as a further hangover from the latest El Nino, from which Indonesian and Malaysian plantations recovered last year.


The large proportion of male flowers, which do not produce fruit, “may be the late consequence of the El Niño drought of 2015”.

Sipef reported a more than trebling in earnings last year to $139.7m, or of 62% to $64.5m excluding the acquisition of PT Agro Muko in Indonesia last March.


Revenues rose 20% to $321.6m.


Sipef shares rose 3.9% to $63.40 in morning deals in Brussels.

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