HIGH commodity prices have boosted the trading of crude palm oil futures (FCPO) on Bursa Malaysia although in terms of equities, average daily value traded has lagged with rising interest rates emerging as a key risk.
In times of volatility, the increased trading in FCPO shows continued confidence from the palm oil industry as well as the global trading community in FCPO as an effective risk management tool.
High commodity prices can cause inflation and tip the global economy into a downturn, which will be negative for the economy.
Hence, the need for active hedging and risk management.
Between January and April 2022, over 5.247 million FCPO contracts, equivalent to 131 million tonnes of crude palm oil (CPO) was transacted, compared to 5.233 million contracts traded in the same period last year.
Foreign institutions contributed 48% of the volume traded in April, 2022, compared to 40% in December 2021.
Bursa Malaysia continues to see progress in various commodity-related initiatives.
Since the launch of the East Malaysia crude palm oil futures on Oct 4, 2021, Bursa Malaysia Derivatives has seen growing acceptance and participation from commercial players, which are palm oil companies, in using the contract as a pricing tool.
CPO producers can now perform physical delivery against the contract by delivering physical CPO to one of 11 port tank installations in East Malaysia.
Three physical tenders in Sandakan, Lahad Datu and Bintulu have successfully taken place this year.
Islamic commodities trading platform Bursa Suq Al-Sila has witnessed improved average daily volume at RM41.92bil in the first three months of 2022, surpassing RM37.28bil achieved in 2021.
Total trading value and total matched contracts hit RM2.56bil and 794,619, respectively, in the first three months of 2022.
This is compared to RM2.1bil and 420,044, respectively, in the same period last year.
The number of local participants has grown from 235 in 2021 to 240 in the first three months of 2022, while the number of foreign participants has surpassed the 64 in 2021 to 67 in the first three months of 2022.
These participants include the Ministry of Finance, four central banks, Islamic banks, commercial and investment banks with Islamic windows, co-operatives, corporations and government agencies.
In terms of the after-hours (T+1) night trading (which was launched on December 6, 2021), a total of 444,960 contracts were traded from Jan 1 to May 24, 2022, contributing 8.5% of the day and night average daily trading volume.
All Bursa Malaysia Derivatives commodity and equity index derivatives contracts can be traded during the T+1 session from Monday to Thursday from 9pm to 11.30pm Malaysian time.
“It provides hedgers a window into the opening of the US market and the closing of the European market respectively, enhancing the price discovery of our products and strengthening the linkage between local and global markets,’’ said Bursa Malaysia.
The revamp of the existing gold futures (FLGD) contract is aimed at providing investors with greater trading and hedging opportunities amidst volatility in the gold market.
Among other enhancements, the FLGD contract will be quoted in US dollars but settled in ringgit, as gold is traded in US dollars.
Bursa Malaysia Derivatives has conducted a thorough assessment of the existing contract through consultations with market participants and industry players to identify certain issues with the existing contract, which will be addressed in the product revamp.
Bursa’s proposal is currently undergoing regulatory review and pending approval.
While its proposal to launch the soybean oil futures contract is pending regulatory review, Bursa Malaysia Derivatives is exploring some other vegetable oils to offer a diverse trading strategy proposition, such as inter-commodity spread trading that takes advantage of the value differential between two or more related commodities.
This would offer traders a platform to trade their views on the relative fundamentals for various types of commodities.
Traders can also arbitrage on prices of the same commodity product listed on different exchanges or denominated in different currencies.
Overall, Bursa Malaysia has yet to benefit meaningfully from this year’s commodity price rally, said Maybank Investment Bank senior analyst Wong Chew Hann.
Equity average daily value on Bursa Malaysia is down to RM2.56bil in the first five months of 2022, against RM3.66bil in 2021.
Key risks include interest rate normalisation which may further impact retail trading participation, and the lack of growth catalysts.
A core earnings growth of minus 1% following a strong recovery of 35.8% in 2021, is seen for the research universe of Maybank Investment Bank.
Bursa Malaysia may benefit for a while from sectors that can capitalise on strong prices for commodities or commodity-type industrials.
Unless this is occurring against a firming interest in equities, it typically will not last very long, as foreign funds flows depend on global sentiments.
Local institutional funds like the Employees Provident Fund, may find it necessary to fund withdrawals by selling into strength; a gradually ageing workforce may mean more withdrawals by people entering retirement.
While the main risk is that high commodity prices may tip the global economy into a downturn, another risk is whether interest in commodity futures and derivatives will maintain beyond the short term, said Etiqa Insurance & Takaful chief strategy officer Chris Eng.
Bursa Malaysia may not be experiencing high trading value in equities as companies are affected by among other things, supply disruptions and rising concerns on inflation and recession.
Nevertheless, it aims to provide effective risk management and hedging tools for commodities trading where prices swing and fluctuate.
Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.