New CPO futures contracts cannot match ours

PETALING JAYA: It will be difficult for newly set-up international crude palm oil (CPO) contracts to rival Bursa Malaysia Bhd’s CPO futures (FCPO) contract, which is the global benchmark pricing for CPO and its related products, say market players.

Apart from Bursa FCPO, CPO contracts abroad are traded on the Dalian Exchange in China, Multi Commodity Exchange in India and the Joint Asian Derivatives Exchange (JADE) in Singapore.

It was also reported that Indonesia plans to launch its own CPO physical contract in July.

A dealer said: “It will not be an easy feat to develop a highly liquid CPO contract like Bursa’s FCPO contract, which is now 27 years old.

“To attain such high liquidity and open interest, operators of CPO contracts will require an in-depth knowledge of the entire CPO industry, of which Malaysia is the pioneer and clearly established market leader.”

Citing the US-dollar denominated CPO contract traded on JADE, a joint venture between Chicago Board of Trade and Singapore Exchange Ltd, the dealer said: “The contract since its launch in 2007 has not been able to get sizeable volumes.

“It has somehow failed to attract the open interest to reflect that the contract can work as a reliable risk shifting or risk management operations.”

On the growing international interest to set up CPO contracts, Bursa Malaysia chief executive officer Datuk Mohamed Yusli Yusoff told StarBiz: “We welcome any new players in the CPO futures market as this will enlarge the pie, which in turn will create more products and opportunities for traders to hedge and arbitrage among various offerings.”

Having said that, Bursa is confident that Malaysia, given its strong CPO futures and physical market, would remain relevant to offer the benchmark pricing.

“Bursa operates a highly liquid FCPO market with high volume and 84,885 open positions as at end-April, thus establishing a forward price curve of up to two years,” Yusli said.

In fact, Bursa’s FCPO hit a record monthly volume of 442,220 contracts in April, its highest since its inception in 1982.

A total of 1.47 million contracts were recorded year-to-date May 15. In 2008, a total of three million contracts were traded compared with 2.8 million in 2007.

“Trading in our FCPO contract has been healthy and shown tremendous growth year-on-year.

“This is clearly demonstrated by the sustained interest by traders who always need to hedge position against the volatility of the edible oils market,” Yusli said.

Apart from the futures market, crude and processed palm oil, palm kernel and other palm products are traded actively in Malaysia on an over-the-counter basis based on the Palm Oil Refiners Association of Malaysia specifications.

On Indonesia’s soon-to-be launched spot CPO contract, Yusli said: “While Indonesia may be the world’s biggest palm oil producer, the CPO benchmark pricing is always determined in the most liquid market.”

He said Bursa’s immediate focus would be to ensure the liquidity and open interest in FCPO contracts continued to grow via initiatives that increased access to the market.

Citing Bursa’s US dollar CPO futures (FUPO) contract launched last year, Yusli said FUPO would serve as viable tool for hedging, price discovery and currency risk management. “We expect it will take time before the contract numbers increase due to global market uncertainties and the absence of market makers.”

He also said the market making framework, which will be made available in the second half of this year, would help spur liquidity and interest in the derivatives market.

“This framework is aimed at facilitating faster time to market for new issuance of structured products in the derivatives space,” he added.

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