KL is world's palm oil price hub

TIGHT CORRELATION: Vegetable oil traders all over the world look to Bursa Malaysia as the global reference for palm oil prices. Refiners tell OOI TEE CHING how palm oil price movement at Bursa Malaysia Derivatives Exchange influence the commodity exports.

IT'S lunch time. The palm oil futures market takes a breather from trade before it re-opens at 3pm.

Bursa Malaysia Derivatives Bhd chief executive officer Chong Kim Seng points to his handphone and notes that one can conveniently access palm oil futures prices on the exchange real time.

"Whether you're in Malaysia or in the United States, India, China or Africa, palm oil prices are quoted out from here, Kuala Lumpur. This is where the buying and selling of crude palm oil futures takes place," he said.

Although there are many markets around the world facilitating palm oil trading, vegetable oil traders and commodity analysts look to Bursa Malaysia as the global hub for price reference.

Back in the 1970s, tin and rubber prices used to be quoted out of Kuala Lumpur. As time went by, however, trading of these commodities became more active and visible in other markets. 

Hence, today, tin prices are quoted out of the London Metal Exchange while rubber prices are directly reported from the Tokyo Commodity Exchange.

This development suggests a shift of commodity trading significance from producer to consuming countries. One may argue that palm oil trade may face the same fate as tin and rubber. Bursa Malaysia may lose its global palm oil price lead to more active futures markets like China's Dalian Commodity Exchange.

Many vegetable oil traders have highlighted that current palm oil trades at the Dalian Commodity Exchange is many times more than the average daily volume settled at Bursa Malaysia Derivatives Exchange. Indeed, Malaysia is no longer the world's biggest palm oil producer nor home to the world's largest market for palm oil derivatives.

When asked what makes Bursa Malaysia the global reference for palm oil price benchmarking, Chong said it all boils down to the exchange's role in maintaining a transparent, efficient and convenient trading environment for market participants, whether they are traders, bankers or speculators.

"We consistently enforce rules to ensure that trading takes place in an open and competitive environment," he said.

"We also promote efficient price dissemination so that businesses in the palm oil value chain, both upstream and downstream, can better benchmark their risks," he added.

Meanwhile, the third month benchmark palm oil futures closed at RM2,613 per tonne yesterday. It has been on an uptrend in the last five weeks. 

As futures prices climbed, palm oil prices in the physical market rose too. In explaining the tight correlation between the two markets, Chong said "there's continuous interplay of price movements between the two markets". 

"This is because the futures market allows for price risk encountered in the physical market to be transferred to other parties more willing to assume the price risks," he added.

Similarly, in taking the cue from price rises in the futures market, plantation counters on the equity market like IOI Corp Bhd, Sime Darby Bhd, Felda Global Ventures Holdings Bhd, Kuala Lumpur Kepong Bhd and Genting Plantations Bhd had seen their share prices go up.

Palm oil refiners benchmark the price of their shipments against that quoted out from Bursa Malaysia at any given time. As the price goes up, so does the value of palm oil exports.

In a separate interview, Palm Oil Refiners Association of Malaysia (Poram) chief executive officer Mohammad Jaaffar Ahmad concurred that the country's palm oil exports are very much influenced by pricing.

In the first 11 months of this year, Malaysia exported RM55.88 billion worth of palm oil products. It is estimated that this number should cross the RM60 billion-mark at the end of the year.

Last year, palm oil shipment totalled RM71.45 billion.

"In the first 11 months of this year, palm oil averaged at RM2,352 per tonne. This is much lower than last year's average of RM2,764 per tonne. The higher the palm oil price, the higher our palm oil exports," he said.

Malaysia produces some 19 million tonnes of palm oil a year, of which about 18 million tonnes are shipped out of the country in the form of cooking oil, margarine, oleochemicals, animal feed and biofuel.

Bursa Malaysia's palm oil futures market value adds to this as Chong noted that this year the exchange is expected to settle around eight million palm oil contracts.

"In the last five years, the palm oil trading volume on the futures market has doubled. Back in 2009, it was only four million contracts. This year, we're expected to surpass eight million contracts. Each contract is 25 tonnes. So, that works out to 200 million tonnes of palm oil settling at the futures market this year," he said.

"If Malaysia only has the physical market, we would only be trading around 19 million tonnes of palm oil. But with Bursa Malaysia's futures market, we can trade up to 10 times that of the physical market," he added.