18/05/2009 (The Star Online) - TOGETHER with a recovery in global commodity prices, crude palm oil (CPO) futures for three-month delivery shot up to above RM2,600 a tonne at Friday’s market closing from RM2,000 on March 31.
The jump in CPO prices has prompted some to complain about speculation in the market, while Bursa Malaysia said speculators played an important role in the market and that prices reflected true supply and demand.
“High prices will hurt consumers, and cakes, detergents and other products will be more expensive. We are not against a high margin for producers but prices have to go up slowly,” a trader told StarBiz.
He pointed out that from March 31 to April 29, the CPO three-month futures jumped more than RM400 a tonne on not very high volume, which he said meant speculation.
Bursa chief market operations officer Devanesan Evanson responded that based on its analysis, the recent price changes were due to sustained interest by the market in ringgit-denominated CPO futures (FCPO) and were in tandem with the movement in prices of other edible oils and crude oil.
There were also fears that the current high price of above RM2,600 was creating risks for smallholders, because if prices were to fall to RM2,100 or RM2,200, large CPO importers like China and India would begin to default.
“We are not in a position to comment on the risk of default by importers like China and India in the underlying physical CPO markets. However, in the futures market, investors are able to hedge the price risk of the underlying physical CPO market,” Devanesan said.
He also explained the importance of speculative buyers in the market.
“Speculative buyers and sellers create the vibrancy of a market. For a futures market to succeed, it is imperative that there are both speculators and hedgers.
“Purely long and short hedgers may not be sufficient to create a liquid CPO futures market. The participation of speculators willing to take the risk on the other side of hedgers adds liquidity and thus makes it easier for hedgers to hedge,” he said.
However, with the highest daily volume for the CPO three-month futures of 20,000 lots traded in the past 12 months, some do not consider it high enough.
Should there be higher volume in the futures market to reflect the real price based on supply and demand?
“The FCPO in April 2009 recorded an all-time high of 442,220 contracts with a daily average of 20,101 contracts traded. The year-to-date May 12, 2009 trading volume was 1,420,139 contracts,’’ Devanesan said.
“We believe the prices reflect the existing supply and demand. Nevertheless, market liquidity can always be improved with participation from more investor types in the CPO futures,” he said.
In an effort to boost trading volumes, Bursa has introduced Direct Market Access (DMA) to facilitate trading access by overseas participants. DMA contributed approximately 7% of market trades in the first quarter of 2009.
Bursa’s futures brokers have also started introducing routing of trades from overseas and Internet trading to increase retail participation. “This will increase access to the market and hence improve the profile of our CPO futures among local and foreign investors,” Devanesan said.
Unusual market activity queries are issued when share prices shoot up without market leads, and the trader that spoke to StarBiz said that there should be a similar system for commodity futures.
Devanesan responded that Bursa conducted queries on unusual price movements on futures broker representatives or trading participants if the situation warranted such a need.
“Investors are aware that trading in FCPO is subject to price limits of 10% from the previous day’s settlement price. If this price limit is triggered, either by price falling or rising significantly, then trading will be conducted within the price limit for 10 minutes.
“After which, the market will be halted as a ‘circuit breaker’ for five minutes. Trading will then resume with the price limit increased to 15%,” he explained.
Late last month, the economic crisis prompted the Organisation of Petroleum Exporting Countries (Opec) and 13 Asian countries meeting in Tokyo to urge for greater oversight of oil and other commodity markets to prevent a surge in prices after the global economy recovered.
However, Devanesan said this question was related to crude oil and even though Malaysia is one of the 13 Asian countries, there was no relevance to palm oil.
“The statement is more in reference to crude oil and the ‘calls for greater oversight of oil and other commodity markets to prevent a surge in prices’ by imposing position limits, reviewing over-the-counter trading, etc,” he said.
Safeguards to manage speculation appear to be in place at Bursa.
All traders were subject to position limits for trading in the FCPO to ensure that speculative trading was conducted in a fair and orderly manner, he said.
“The exchange does not attempt to influence prices as that is purely a function of the market, where trading activities are usually affected by economic indicators, changes to government policies (e.g. palm oil import duties imposed by other countries), as well as trading indicators such as prices of other correlated commodities like crude oil and soyoil,” he added.
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