China’s bid to establish global benchmark for palm oil futures seen an uphill battle

China, the world’s No. 2 palm oil importer, opened its palm oil futures contract to overseas investors, but trading risks and Malaysia’s more influential status as a producer mean it will struggle to become a global benchmark.

Five Malaysia and Singapore-based traders told Reuters they had no immediate plans to trade the Dalian Commodity Exchange’s yuan-denominated palm oil due to volatility and currency exposure risks, and will stick to the benchmark Bursa Malaysia Derivatives (BMD) contract.

“Dalian will have an impact but not actually sway the market. BMD would keep on having a much bigger sway on prices,” said Sandeep Singh, director of Kuala Lumpur-based consultancy and trading firm The Farm Trade.

The move by China is its latest effort to become a global commodities pricing power in line with its weight in global trade. It has opened six other contracts to foreign investors including crude oil, iron ore and most recently, copper.

The Dalian Commodity Exchange said its move was prompted by calls from the domestic and foreign palm oil industries and noted the pivotal role China has in the supply chain.

But China does not produce the oilseed and major producers are more likely to have a successful futures market because of the role of supply on prices, analysts said.

“What’s most practical is whether you have the right tender points to amalgamate physical along with futures,” said Singh.

Yang Jian, research director at the J.P. Morgan Center for Commodities at the University of Colorado Denver, added the Dalian palm contract had a weak price discovery function, even domestically, with no stable relationship between the national cash or import price and the most active futures price.

Still, the contract could serve as a useful arbitrage tool between futures in China and elsewhere, which could in turn improve its price discovery function, said Yang.
Source: Reuters (Reporting by Emily Chow in Shanghai and Mei Mei Chu in Kuala Lumpur; Editing by Edwina Gibbs)