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Palm oil futures "speed up" the process of internationalization, the industry hopes to increase its price influence

Fang submitted 2020-12-14 12:18:41

Palm oil futures "speed up" the process of internationalization, the industry hopes to increase its price influence

On November 20, China Securities Regulatory Commission officially announced that it determined that the palm oil futures in Dalian Commodity Exchange were designated as the domestic varieties. As a result, palm oil futures became the seventh domestic futures market and the first domestic specific product in the listed agricultural futures. "The approval of palm oil futures as a specific domestic product that is open to the world is another important step for China's futures market to open to the world and serve global industrial enterprises. It is conducive to continuously consolidate the achievements of the futures market opening to the world, effectively enhance the global pricing power of China's futures market, and further enhance the ability and level of China's futures market to serve the global industrial chain." A relevant market person said in an interview with a reporter from the Grain News.

More than ten years listed on the market, palm oil futures gain a lot.

Palm oil is the world's largest vegetable oil variety with the largest international trade volume. The main producing areas are Southeast Asia and Africa. In 2019, global palm oil production exceeded 70 million tons, accounting for about one-third of global vegetable oil production. In 2019, palm oil consumption was about 71 million tons. China's palm oil is all dependent on imports. It is currently the world's second largest importer and third largest consumer of palm oil. In 2019, China's palm oil consumption exceeded 6.4 million tons, of which 60% came from Indonesia and 30% came from Malaysia.

Palm oil futures were listed on DCE in 2007 and are China's first fully imported commodity futures. Since its listing for more than ten years, the market has been operating steadily, and DCE has developed into the world's largest palm oil futures market. Statistics show that from 2009 to 2019, the annual trading volume of palm oil futures has been at the forefront of China's agricultural futures market for many consecutive years. In 2019, the trading volume was 135 million lots, equivalent to 1.35 billion tons, and the average daily open interest was 420,000 lots, equivalent to 4.2 million tons. The trading volume ranked the third in the country’s agricultural product futures. Calculated on a comparable basis, it is 5.77 times the trading volume of Malaysian Derivatives Exchange (hereinafter referred to as BMD). In the first half of this year, DCE's palm oil futures trading volume ranked second in the global agricultural futures options market, and its influence is increasing.

Palm oil futures have provided many companies engaged in foreign trade with tools to avoid risks. A domestic foreign-funded food company is planning to add production and storage equipment. The person in charge of the company told reporters: "After the project is completed, the company's palm oil trade volume will greatly increase. The company has a large number of raw grain bases in foreign production areas, so it needs to increase investment in China to digest upstream products. The market this year is like a roller coaster. Companies are facing a lot of risk managements, mainly through domestic and foreign futures markets. Companies began to attach importance to the futures market after the 2008 financial crisis, mainly engaged in palm oil futures hedging."

It is understood that the import volume of palm oil companies currently using palm oil futures to hedge accounts for more than 85% of China’s import volume. Large oil companies in China and multinational grain and oil companies in China have made full use of palm oil futures to carry out hedging transactions. Palm oil futures have become an indispensable tool for risk management of these companies; the correlation coefficient of palm oil futures and spot prices is 0.99, 70% of domestic palm oil spot trade uses DCE's palm oil futures price for basis price pricing. Palm oil futures have become the benchmark for domestic spot trade pricing and have a profound impact on international market pricing.

Speed up the process of the internationalization and move forward at the right time

Palm oil is China’s fully imported commodity. After the internationalization of the futures market, its production, processing, and consumption will be opened up. Overseas customers can participate in BMD and DCE markets at the same time, which can better satisfy domestic and overseas palm oil production, processing and trade. The hedging needs of enterprises have formed a complete industrial risk management chain to help the "One Road and One Belt" industrial cooperation to move forward stably.

"Internationalization can bring tangible benefits to companies engaged in international palm oil trading. At present, international palm oil trading prices are mainly based on Malaysia market as a reference." In an interview with reporters, a domestic grain and oil trading company believed that for palm oil futures to be internationalized, pricing power is very important. For example, palm oil producing countries such as Malaysia and Indonesia mainly refer to Malaysia market. In fact, many of them are caused by historical habits.

The above-mentioned people suggested that the internationalization of palm oil futures also requires the participation of people from foreign origins, especially the participation of upstream growers and direct processing companies to attract them to participate in domestic futures market transactions. Through the “Belt and Road” initiative, it will connect with the local government and do enough effort in policies and systems to break through barriers. This will help more international industries to participate. "Covid-19 in this year has made palm oil prices weak in the early stage, but demand has been improving in the later period, resulting in palm oil prices rising." Talking about the palm oil market this year, the person in charge of a large domestic grain and oil processing company said.

The reporter learned during the interview that the company's annual palm oil imports have increased in recent years. Upon learning that DCE was preparing to introduce foreign traders to participate in palm oil futures, the person in charge thought, “This is not only helpful for foreign companies, but also for domestic companies like us, and this also can drive the trading volume of the domestic futures market. The pricing benchmark will shift to the domestic market, and the futures market will play a better role in price discovery."

The person in charge said that after the introduction of foreign traders, futures prices will add the relevant information of the origin, can more fully reflect the market, and will also provide companies with more effective hedging tools.

During the interview, the reporter learned that many market participants also believe that for the futures market, as more and more foreign companies such as international palm oil processing and trading companies participate, it can promote the deep integration of domestic, foreign and futures palm oil markets. At the same time, it will help palm oil futures contracts to be active in recent months and improve the continuous of the most active traded contracts, improve the efficiency and liquidity of the palm oil futures market, optimize the market structure, and further improve the quality of market operation and development, this can better serve the global palm oil industry enterprises with the risk management services.

“DCE has officially launched the internationalization of palm oil futures since 2016. After full research on domestic and foreign markets, continuous improvement and improvement based on the opinions of all parties in the market have formed an internationalization program widely recognized by the market.” According to DCE, the person in charge of the Ministry of Agriculture revealed that the international trading, settlement, and risk control of palm oil futures adopt the current methods of specific domestic varieties such as iron ore. The original contract and basic system remain unchanged, the core technical system remains unchanged, and the core clearing and the risk control mode remains unchanged. At present, DCE is actively preparing for the implementation of palm oil futures to introduce overseas traders to ensure the smooth acceptance of overseas traders and the stable operation of the market.

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