Hard to cultivate fruitful CPO exchanges

BMD Exchange Still Numero Uno
It is undeniable that crude palm oil (CPO) has become the world’s most tradeable vegetable oil despite the constant bad publicity it receives on the issue of sustainability and environment.

This is well reflected by the growing number of international CPO contracts being set up in most major consuming and importing nations as the annual world demand for palm oil keeps growing at a very healthy pace.

Apart from Malaysia’s Bursa Derivatives Exchange CPO futures (FCPO) contract, there are now CPO contracts traded at the Dalian Exchange in China, Multi Commodity Exchange in India and the Joint Asian Derivatives Exchange (Jade) in Singapore.

The latest to jump on the bandwagon is Indonesia, which is currently the world’s largest palm oil producer. It launched its own CPO physical contract under the Jakarta Futures Exchange (BBJ) last July in its bid to create a local benchmark pricing.

The republic is also planning to launch a CPO futures contract this April via newly set up commodities and derivatives exchange, PT Bursa Komoditi and Derivatif Indonesia (ICDX).

However, despite the euphoria in setting up international CPO contracts, perhaps it is worth noting that Jade and BBJ are still struggling to attract market players to trade CPO as they have failed to attain sizeable volumes given very poor liquidity in the market.

The US-dollar denominated CPO contract traded on Jade, a joint venture between Chicago Board of Trade and Singapore Exchange Ltd, for example failed to attract open interest since its launch in 2007 while BBJ spot CPO contract was reported to have only traded about 29,000 tonnes versus Indonesia’s production of 21 million tonnes of CPO in 2009.

While Indonesia may have good reasons to set up its own benchmark pricing to better reflect its local supply and demand, and elimination of currency risk factors given its stature as the world largest CPO producer, one must realise that the CPO benchmark pricing is always determined in the most liquid market.

For example, Malaysia’s Bursa Derivative Exchange has about 28 years’ experience in developing a highly liquid CPO contract backed by an in-depth knowledge of the entire industry to ensure sound success in CPO trading.

In fact, many industry observers expect it would be difficult for most newly set up international CPO contracts to challenge Bursa’s FCPO contract which has in fact become a global benchmark pricing for CPO and its related products.

A lot at work is involved to ensure that the CPO contracts can be a reliable risk shifting or management operations. This reflects the hard work by Bursa to ensure sustained interest among traders who always need to hedge position against the volatility price movement in the world edible oil market.

Over the years, trading in the local FCPO contract has been healthy and showing tremendous growth year-on-year. Last year, four million contracts were traded. In 2008, a total of three million contracts were traded compared with 2.8 million in 2007.

Having said that, despite Bursa’s sucess in operating a highly successful FCPO market, the exchange would still need to increase it efforts to ensure growth in the FCPO via initiatives that would promote higher access to the world markets.

Assistant news editor Hanim Adnan believes that Indonesia’s ICDX CPO futures contract will be interesting to watch as it will be headed by a former Bursa executive director, who is said to have roped in many big Indonesian plantation companies to trade in the new exchange.