As the world’s largest exporter of palm oil, Malaysia is naturally positioned to be at the center of trade of the world’s most consumed edible oil. But to make sure it retains this pre-eminent position in today’s increasingly financialized commodity markets, Bursa Malaysia Derivatives Berhad (BMD) has not been resting on its laurels. In recent years, it has set an aggressive expansion path, increasing both product offering and international reach while also consolidating its crude palm oil futures contract as the global benchmark.
To drive this strategy, BMD has also stepped up its cooperation with partner and 25 percent shareholder CME Group, and bringing new derivative products to an expanded international customer base.
This all means, going into this year’s annual Palm & Lauric Oils – Price Outlook Conference & Exhibition 2015 (POC2015), the palm oil industry’s premier annual event held each year in Kuala Lumpur, interest in the industry is at record levels, buoyed by the recent roller coaster of price volatility and growth in trading volumes.
In 2014, BMD saw its total volume of derivatives traded rise 17 percent, led by a 28 percent growth in crude palm oil futures. To get a sense of what lies ahead for the exchange and the fast developing world of palm oil, we sat down with Chong Kim Seng, CEO of Bursa Malaysia Derivatives Berhad.
We just experienced a year of tremendous volatility in palm oil. How much is greater weather- related volatility increasing demand for your products and how are you responding to this?
We are carrying on the volatile market momentum from last year into this year. Market events ranging from ECB’s latest announcement of QE, the Swiss Franc turmoil, to the Greek election leaning towards a less austere government impact global economics. Palm oil is unavoidably impacted and affected.
Crude palm oil futures are similarly facing higher volatility as a result of the lower oil markets and from the recent overwhelming floods in Malaysia. The sharp weakening of the Ringgit added to the market uncertainty and volatility.
Trading on our market has benefited from the increased volatility as businesses needed to hedge more and manage their books and exposure better. With the way the momentum is carrying on into this year and with the more volatile market outlook that is before us, we expect trading volume to again keep growing.
BMD recorded impressive growth figures in 2014. How would you rate the performance of your first joint initiative with CME Group on the BMD Crude Palm Oil Futures (FCPO) contract?
Growth in 2014 was impressive. When we started with CME in 2009, we were trading around 2 million contracts for FCPO, or 50 million tons. In 2014, FCPO volume crossed 10 million contracts, or 255 million tons.
We are now trading FCPO at 13 times over the physical palm oil production in Malaysia of 19 million tons, or 5 times over the world physical palm oil production of 50 million tons. The growth momentum continues for us into 2015 as we are tracking 20 percent growth so far. If this continues, we can expect to see over 310 million tons of FCPO being traded this year.
Given the dramatic sell-off in oil-related commodities is dominating market attention now, do you expect this to impact the palm oil market and lead to slower growth?
Palm oil is currently used to feed and to fuel the world. Palm oil as food will form a very strong demand base and this will not change for a long time to come. Oil markets are very visibly impacting palm oil prices and increasingly so. The dramatic sell off of oil commodities has also caused palm oil prices to follow. If not for the serious flooding in Malaysia that threatened short term supply and caused draw down of inventory, palm oil prices could have gone even lower.
Against that, China is reported to be interested in building up inventory for commodities again given the low prices. So that may change the supply and demand equation yet again. We are very positive on the long term growth of the palm oil industry regardless of short term market variability.
You have now been on CME Group’s Globex platform since 2010, how has this benefited BMD and what changes have you seen in the customer base and types of trading?
Foreign participants now make up 40% of all our trades. Pre-CME Globex, foreign participation was at 27%. CME Group’s Globex trading platform has truly helped us internationalize. We have also added global participants from the financial market community. Among them are hedge funds, proprietary trading firms and algo traders. Interest has also come from inter-market arbitrageurs and spreaders. As we continue to build up our market, we foresee more trading will come from these arbitrageurs and spreaders. This also ties with the reported impending opening up of the China market to overseas participants.
Last June, BMD launched a new palm olein futures contract. Can you give an update on how this has performed and how it compares to your suite of existing palm oil products?
We are glad to have launched our Palm Olein Futures contract (FPOL) in June last year. It complements the FCPO and provides market participants with the ability to trade across the palm oil complex. Palm olein and palm stearin are products that come out from the refining process of crude palm oil. With FPOL, it will allow for hedging and better management of the volatile refining margins.
The China palm olein destination market was, for a large part of last year, at negative shipping economics from the production markets in Southeast Asia due to large inventory storage. The overhang inventory situation in China is slowly receding. Once shipping economics normalizes, we are sure market participants will view the potential interplay between FPOL and FCPO including DCE’s Palm Olein futures contract more positively.
We understand BMD has been granted registration as a Foreign Board of Trade by the U.S. Commodities Futures Trading Commission (CFTC) on Jan. 22. With this order, can you tell us who are going to be your target customers?
Our target audience will be U.S.-based commodity trading advisers (CTAs), hedge funds, high volume traders and commercials who are actively involved in the global edible oil trade. CTAs are managed fund managers, who will now have yet another new product in their commodity portfolio.
We see many arbitrage trading opportunities for fund managers trading between crude oil and bean oil with palm oil. Both crude oil and bean oil products have good correlations with the palm oil. Given palm oil as a global commodity, we see strong trading interest coming from out of U.S. for it.
So this latest CFTC approval for market access will efficiently facilitate these strong U.S. trading interests to trade BMD palm oil products.
Which products do you believe will attract U.S. customers?
The main attraction will be our Crude Palm Oil Futures contract (FCPO), being the global pricing benchmark for palm oil. Bean oil traders in the U.S. who are very familiar with the edible oil complex will find a strong correlation with palm oil.
The other attraction will be our FBM KLCI Index Futures contract (FKLI). FKLI gives easy and quick access and exposure to the advanced emerging Malaysian market.
What’s next for BMD after this flurry of product expansion? Is it time for consolidation or should we expect new initiatives?
We launched Gold futures contract (FGLD) in October 2013. In June 2014, we launched Palm Olein futures contract (FPOL) and in December 2014, BMD launched an enhanced five-year Malaysian Government Securities futures contract (FMG5). We have quite a lot on our hands for now and will be working to ensure there is trading traction on these products.
We have plans to add further offerings and will make strategic decisions when appropriate. In the meantime, we want to continue to strengthen on what we already have.