Hedging Palm Oil in Bursa Malaysia Derivatives

Transcription

1 Hedging Palm Oil in Bursa Malaysia Derivatives Jeffrey Tan General Manager, Product & Market Development Bursa Malaysia Derivatives Berhad 2 nd Palm Oil Internet-based Seminar 7-13 February

2 Concept of Hedging Hedging is the transfer of price risks associated with physical palm oil market activities. For palm-oil based product distributors, the way to control costs and margins is to hedge. For upstream producers, the way to lock in desirable margins is to hedge. By not hedging, a company is actually speculating that the market will move favorably with respect to their market position! Recent history suggests price peaks and troughs are unpredictable due to unforeseen political events, weather, as well as supply and demand imbalances. A comprehensive hedging program provides risk management since financial performance is materially impacted by fluctuating prices.

3 Who Should Hedge Palm Oil Products Exposure Any companies whose margins are impacted by increasing or decreasing prices of palm oil products Examples : producers, millers, refiners, traders, wholesalers and end-users Hedging is needed at every level of palm oil value chain, from FFB harvesting to milling to refining and to the end products

4 Palm Oil Derivatives Products Offered Malaysian Ringgit-Denominated Crude Palm Oil Futures Crude Palm Kernel Oil Futures USD-Denominated Crude Palm Oil Futures Kuala Lumpur Composite Index Futures Kuala Lumpur Composite Index Options Single Stock Futures 3-Month KLIBOR Futures 3-Year Malaysian Government Bond Futures 5-Year Malaysian Government Bond Futures

5 01/01/ /10/ /07/ /04/ /01/ /10/ /07/ /04/ /01/ /10/ /07/ /04/ /01/ /10/ /07/ /04/ /01/ /10/ /07/ /04/ /01/ /10/ /07/ /04/ /01/ /10/ /07/ /04/ /01/ /10/ /07/ /04/ /01/ /10/ /07/ /04/ /01/ /10/ /07/ /04/ Bursa CPO Settlement Price (RM) FCPO Settlement Price (RM)

6 Price Comparisons* January 2011 (RM/MT) October 2010 (RM/MT) October 2005 (RM/MT) Crude Palm Oil 3,771 2,853 1,456 RBD Palm Oil 3,819 2,951 1,510 RBD Palm Olein 3,828 2,978 1,558 RBD Palm Stearin 3,752 2,921 1,286 Palm Kernel Oil 6,440 4,224 2,076 * Source : MPOB

7 Futures Market Futures market an auction market where participants buy and sell CPO/PKO for delivery on a specific future date Futures contract contract between buyer and seller where buyer is obliged to take delivery and seller is obliged to provide delivery of a fixed amount of CPO/PKO at a predetermined price at a specified location Everything is standardized except price. Already determined include: commodity, quantity, quality, delivery date

8 Trade Flow Broker A Clearing House Clients notify their brokers on their trade orders Brokers key in their clients orders in the trading system Bursa Malaysia Derivatives Matched trades are sent to the Clearing House to be cleared and to Surveillance Broker B Orders are routed to the Exchange and matched Surveillance Notification is sent once trades are matched

9 Screen Shot of a Typical Trading Day Contract Prices (RM) Volume Open Previous Open High Low Average Settlement Change Interest September, ,717 2,690 2,717 2,667 2,691 2, ,619 October, ,628 2,620 2,633 2,569 2,597 2, ,807 13,572 November, ,560 2,555 2,567 2,502 2,535 2, ,235 23,114 December, ,540 2,533 2,543 2,477 2,513 2, ,171 14,706 January, ,534 2,539 2,539 2,473 2,514 2, ,527 February, , , March, , , ,817 May, ,507 2,526 2,526 2,510 2,521 2, ,125 July, ,518 2,528 2,528 2,528 2,528 2, September, , , November, ,523 2,525 2,525 2,525 2,525 2, January, ,540 2,535 2,535 2,518 2,530 2, March, ,545 2,538 2,538 2,502 2,520 2, May, , , July, , ,

10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Crude Palm Oil Futures Forward Curve (at 21 st Oct 2010) RM/MT 3,000 Crude Palm Oil Futures All Month Prices 2,995 2,990 2,985 2,980 2,975 2,970

11 Crude Palm Oil Futures Contract Specifications Contract Code Underlying Instrument Contract Size Minimum Price Fluctuation Contract Months Trading Hours Speculative Position Limits Final Trading Day and Maturity Date Tender Period FCPO Crude Palm Oil 25 metric tons RM1 per metric ton Spot month and the next 5 succeeding months, and thereafter, alternate months up to 24 months ahead First trading session: Malaysian10:30 a.m. to 12:30 p.m. Second trading session: Malaysian 3:00 p.m. to 6:00 p.m. 500 contracts net long or net short for the spot month 5,000 contracts for any single delivery month except for the spot month 8,000 contracts for all contract months combined Contract expires at noon on the 15th day of the delivery month, or if the 15th is a non-market day, the preceding Business Day. 1st Business Day to the 20th Business Day of the delivery month, or if the 20th is a non-market day, the preceding Business Day.

12 Crude Palm Oil Futures Contract Specifications Daily Price Limits Except for spot month trades, trades in any month shall not be made at prices more than 10% above or below previous day s settlement prices ( the 10% Limit ) except as provided below. When at least 3 non-spot month contracts are trading at the 10% Limit, there shall be a 10-minute cooling off period for all contract months (except the spot month) during which trading shall only take place within the 10% Limit. Following this cooling off period, all contract months is specified as interrupted for a period of 5 minutes, after which the trades for all contract months (except the spot month) shall not vary more than 15% above or below previous day s settlement prices ( the 15% Limit ). If the 10% Limit is triggered less than 30 minutes before the end of the first trading session, the following shall apply:- a. the contract months shall not be specified as interrupted; b. the 10% Limit shall be applied to all contract months (except the spot month) for the rest of the first trading session; and c. the 15% Limit shall be applied for all contract months (except the spot month) during the second trading session. If the 10% Limit is triggered less than 30 minutes before the end of the second trading session, the 10% Limit shall be applied to all contract months (except the spot month) for the rest of the day.

13 Crude Palm Oil Futures Contract Specifications Contract Grade and Delivery Points Crude Palm Oil of good merchantable quality, in bulk, unbleached, in Port Tank Installations approved by the Exchange located at the seller s option at Port Kelang, Penang/Butterworth and Pasir Gudang (Johor). Free Fatty Acids (FFA) of palm oil delivered into Port Tank Installations shall not exceed 4% and from Port Tank Installations shall not exceed 5% Moisture and impurities shall not exceed 0.25%. Deterioration of Bleachability Index (DOBI) value of palm oil delivered into Port Tank Installations shall be at a minimum of 2.5 and of palm oil delivered from Port Tank Installations shall be at a minimum of Deliverable Unit 25 metric tons, plus or minus not more than 2%. Settlement of weight differences shall be based on the simple average of the daily Settlement Prices of the delivery month from: a. the 1st Business Day of the delivery month to the day of tender, if the tender is made before the last trading day of the delivery month; or b. the 1st Business Day of the delivery month to the Business Day immediately preceding the last day of trading, if the tender is made on the last trading day or thereafter.

14 FCPO is a physical delivered futures contract C Notice of Tender (with NSR) must be submitted during tender period (1 st 20 th ) A Client Clearing (Seller) Broker (S) PTI Seller Delivers CPO to PTI issues NSR PTI Name & Location of PTI Date of Appraisal Certification of Quality Validity Date of NSR PTI conducts Appraisal: M&I FFA DOBI B Clearing House D Tender Advice will be allocated to CPs on proportionate basis (based on OP) Clearing Clearing Broker (B1) Broker (B2) E Tender Advice allocated to CP is onward allocated on random basis at client s level Client 1 (Buyer) Client 2 (Buyer)

15 Approved Port Tank Installation Owners Butterworth Bulking Installation Sdn Bhd Cargill Palm Products Sdn Bhd Felda Bulkers Sdn Bhd Felda-Johore Bulkers Sdn Bhd Felda Palm Industries Sdn Bhd FIMA Palmbulk Services Sdn Bhd FIMA Bulking Services Bhd Golden Hope Latex Sdn Bhd Kuala Lumpur Kepong Bhd Socship Company Bhd Wilmar Bulking Installation Sdn Bhd Palmco Oil Mill Sdn Bhd Simit Bulking Installation Sdn Bhd Pacific Oils & Fats Industries Sdn Bhd Stolthaven (Westport) Bhd

16 Long Hedge Against Rising Prices In a rising spot price environment, a CPO trader who purchases and re-sells CPO may have difficulty passing on his costs while protecting his profit margins. He decides to purchase Bursa CPO for a percentage of his future commitments. He trades 300,000 tons a year and decides to hedge 25,000 tons or 1 month s commitment. He buys 1,000 contracts (equivalent to 25,000 tons) at RM3,700 per ton. Over the course of the next 10 days, prices rose to RM4,000 per ton. He sells out his Bursa at RM4,000 thereby realizing a gain of RM300 per ton. The gain is offset by the higher cost of physical CPO he needs to purchase. Physical Market Futures Market 21 Jan 2011 RM3,700 Buys 1,000 RM3,700/MT = RM92.5m 31 Jan 2011 RM4,000 buys RM4,000/MT = RM100.0m Futures Profit = RM100m RM92.5m = RM7.5m Sells 1,000 RM4,000/MT = RM100.0m Effective Physical Price = RM100m (RM100m RM92.5m) = RM92.5m

17 Short Hedge Against Declining Prices A plantation company sees that prices have risen dramatically recently. His breakeven price is RM1,200-RM1,500 per ton. Bursa s futures have gone to RM4,000 per ton from RM3,700. The company realizes that if it could sell a percentage of CPO at RM4,000, the company would realize an attractive profit margin. Not knowing where prices will be over the short term, the company decides to sell short Bursa futures at RM4,000 and lock in a sale (substitute sale) to realize the margin. Shortly after, prices headed south to RM3,500. Physical Market Futures Market 31 Jan 2011 RM4,000/MT RM4,000/MT 28 Feb 2011 RM3,500/MT RM3,500/MT Futures Profit = RM4,000 RM3,500 = RM500/MT Effective Physical Price = RM3,500 (RM3,500 RM4,000) = RM4,000/MT

18 Frequently Asked Questions (1) What is a crude palm oil futures contract? It is a legally binding agreement guaranteed by Bursa Malaysia Derivatives and regulated by Securities Commission between a buyer and seller to make or take delivery of a standardized quantity and grade of crude palm oil. The price is agreed upon by the buyer and seller in the form of bids and offers placed with a Bursa Malaysia Derivatives broker or Trading Participant

19 Frequently Asked Questions (2) If I purchase a Bursa CPO futures contract, will I have to take physical delivery on the contract No. While you can take delivery of Bursa s futures contracts at specified delivery points such as Port Klang, Butterworth or Pasir Gudang, you do not have to take delivery. By purchasing the contract and then selling an equal number of contracts in the same month before the expiration, you no longer have an obligation to fulfill the contract. The majority of futures contracts traded do not end up becoming physical transactions. The same applies for sellers.

20 Frequently Asked Questions (3) Does working with a Bursa Derivatives Trading Participant or broker replace any relationships that a company may have with regard to buying and selling oil palm products? No. A palm oil-related company will still buy and sell oil palm products to or from whomever they may currently be buying or selling. Working with a Bursa Trading Participant will complement those relationships.

21 Frequently Asked Questions (4) When I call up to place an order to buy or sell a futures contract, who is on the other side and how do I know that they will fulfill their obligation on the One of the benefits of trading futures contracts is anonymity. The person who is on the other side of the trade is represented by a broker (member of the exchange) just like you are. The exchange acts as a central clearinghouse for buyers and sellers. The party who is on the other side of the contract may have an inverse risk profile in your market, may be a speculator, or may be liquidating (getting out of a contract). As for the performance of the contract, the exchange ultimately guarantees the performance of the contract regardless of whether a counter party is able to meet its obligation.

22 Frequently Asked Questions (5) How do I get started hedging with futures contracts? First, you need to open a hedging account with a Bursa Malaysia Trading Participant (a list of which can be found in our website, Then you need to deposit margin that is a good faith deposit for the performance of the contract that you are going to buy or sell. After this, you need to speak with a futures broker representative ( FBR ) who can help you come up with a game plan to accomplish your hedging goals.

23 Summary 1. Hedging takes away the uncertainty of price fluctuations. For downstream palmoil-based users, the only way to control your costs is to hedge. For upstream producers, protecting your margins is through hedging. 2. Not hedging means the company is actually speculating that the market will move favorably with respect to its market position. 3. Prices are volatile and uncertain. Hedging is imperative for risk management in securing pricing and sales, enabling more accurate and predictable cash flow projections and enhanced inventory management control.

24 List of Futures Brokers ( 1. AmFutures Sdn Bhd 2. Innosabah Options Futures Sdn Bhd 3. Oriental Pacific Futures Sdn Bhd 4. JF Apex Securities Bhd 5. Inter-Pacific Securities Sdn Bhd 6. OSK Investment Bank Bhd 7. CIMB Futures Sdn Bhd 8. JPMorgan Securities (Malaysia) Sdn Bhd 9. Phillip Futures Sdn Bhd 10. ECM Libra Investment Bank Bhd 11. Kenanga Deutsche Futures Sdn Bhd 12. RHB Investment Bank Bhd 13. HDM Futures Sdn Bhd 14. LT International Futures (M) Sdn Bhd 15. Sunny Futures Sdn Bhd 16. HLG Futures Sdn Bhd 17. Okachi (M) Sdn Bhd 18. TA Futures Sdn Bhd 19. Interactive Futures Sdn Bhd

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