The exchange needs to be more competitive and vibrant for traders and hedgers

pic by TMR File

BURSA Malaysia Bhd and Bursa Malaysia Derivatives Bhd (BMD) must not make the mistake of taking the challenge posed by Singapore’s Asia-Pacific Exchange’s (Apex) US dollar denominated palm oil complex contracts lightly.

The new upstart is reported to be gaining a foothold in the edible oils market with an average of 20,000 contracts of crude palm oil futures (FCPO) traded daily.

It also has a RBD (refined, bleached and deodorised) palm olein futures contract with physical deliveries available via ports in Malaysia and Indonesia.

Exchanges in the region have in the past launched their own derivative contracts without much success of dislodging the role BMD’s FCPO contract has as the global benchmark in the pricing of palm oil.

Apex is a very different rival as it is part of China’s strategy to become a global powerhouse in the commodities market and expand its influence overseas.

About two thirds of China’s edible oil requirement is met through imports. The ongoing US-China trade dispute means that the latter may source more

of its edible oil requirement from the region, which could lead to higher contract volumes on Apex.

Volume tends to beget volume in the derivative business and the rising liquidity tends to attract more participants into the contract and exchange, thus likely diminishing some of the pricing influence of BMD’s FCPO benchmark.

If Apex continues to attract suppliers and buyers of palm product, the exchange’s contracts could gradually become market benchmarks and Chinese buyers would become the price setters rather than price takers.

This is more so as the market participants on Apex will likely have good access to US dollar financing in Singapore, which is a good advantage to have in the commodity business.

The FCPO contract is the lifeblood of the BMD. Even though BMD has seen its volume of contracts traded grow exponentially since moving to electronic trading in the late 1990s, the exchange remains dependent on the FCPO contract for almost 90% of the 14 million contracts traded yearly on the exchange.

The launch of new futures and options contracts like gold, palm olein or the mini FTSE FM70 contracts have attracted limited trading interest.

Year-on-year, the numbers on the BMD suggest volumes may have plateaued at about 14 million contracts yearly, unless there is a new catalyst that could help drive up volumes further.

As such, Bursa Malaysia and BMD’s leadership must ensure that the exchange retains its role in the edible oils market by making the exchange more competitive and vibrant for traders and hedgers.

It won’t be easy as local interest in derivatives here remains the domain of a few.

While the BMD is a reliable market with a healthy lead over Apex in the palm oil’s complex market for now, nothing must be taken for granted.

When low-cost carrier Air Asia Group Bhd, under Tan Sri Dr Tony Fernandes, come on to the market with its new business model, many felt the incumbent Malaysia Airlines Bhd (MAS) would crush it.

Two decades on, and the low-cost airline has not only survived, it has become a global brand with operations regionally, while MAS has fallen into hard times.

Now, who would have thought two decades ago that China would be the economic powerhouse it is today…

Bhupinder Singh is corporate desk editor of The Malaysian Reserve.