Minister: East Malaysian palm oil companies should use Fepo in risk management to remain competitive

A worker shows palm oil fruits at a factory in Sepang November 20, 2014. — AFP pic
A worker shows palm oil fruits at a factory in Sepang November 20, 2014. — AFP pic

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KUALA LUMPUR, Oct 4 — The government has urged East Malaysian palm oil companies to consider implementing the East Malaysia Crude Palm Oil Futures Contract (Fepo) in their risk management strategy to remain globally competitive.

Minister of Plantation Industries and Commodities Datuk Zuraida Kamaruddin said the establishment of Fepo in Sabah and Sarawak will elevate the Malaysian palm oil industry to greater heights, especially in setting benchmarks for the global palm oil price.

“The launch of Fepo in East Malaysia, the 45 per cent contributor to last year’s crude palm oil (CPO) total production, is therefore timely for the development of the palm oil industry in Sabah and Sarawak.

“Companies in both states (can) hedge on the opportunity to market their crude palm oil directly to Bursa Malaysia Derivatives and save on the transportation cost before exportation,” she said in her pre-recorded special address at the (Fepo) Virtual Ceremony Launch 2021 today.

Likewise, she said countries neighbouring Sabah and Sarawak such as China can now purchase palm oil in East Malaysia instead.

“Such avenue enables greater transparency in the East Malaysia palm oil market, potentially safeguarding refining margins and the pricing competitiveness of local palm oil players,” she said.

Zuraida said the implementation of Fepo in East Malaysia will also contribute to the development of the economy and provide job opportunities to the people of Sabah and Sarawak.

Furthermore, she said the respective state governments will be able to reciprocate the benefits and gain additional incomes from the port activities subsequent to the commissioning of the port tank installations (PTI) for the Fepo market.

Bursa Malaysia Derivatives chairman Datuk Muhamad Umar Swift said in a highly volatile environment, it is critical for businesses to consider implementing a more robust price risk management strategy to mitigate against fluctuating commodity prices while remaining competitive.

“Looking ahead to 2022, market participants need to brace themselves for another uncertain year, with numerous key elements having the potential to cause heightened price volatility.

“These include the unpredictable weather conditions, uncertain economic recovery, and potential changes to global trade policy,” he said in his keynote speech at the virtual launch of the Fepo 2021.

In 2020, Zuraida said palm oil constituted nearly 3.6 per cent of the gross domestic product (GDP) and contributed 57 per cent of Malaysia’s commodities output to the GDP.

“Covid-19 pandemic has affected the agro commodity sector around the globe and Malaysia is no exception. In 2020, Malaysia produced 19.1 million tonnes of Crude Palm Oil (CPO), a slight drop of 3.6 per cent from the previous year.

“Total exports of Malaysian palm oil in 2020 declined by 7.0 per cent to 16.2 million tonnes compared to 2019, largely attributed to restrictions on the importation of refined palm oil by India during the first six months of 2020,” she said.

However, despite CPO exports to India starting to pick up again since July 2020 following the CPO export duty exemption by the government, she said the higher prices of palm oil, especially in the second half of 2020, resulted in an increase of 8.4 per cent to RM73.3 billion in the total export revenue despite the lower palm oil exports.

Sabah Chief Minister Datuk Seri Panglima Hajiji Noor sees Fepo playing a vital role in the future development of the palm oil industry in Sabah.

“It will allow domestic palm oil businesses to discover alternative pricing through the exchange and, upon contract expiry, businesses can deliver CPO to any of the three designated delivery points, whichever is closest to their trading operation.

“In addition, it will create more business and job opportunities along the whole supply chain of palm oil industries, such as transportation, storage facilities, quality surveying, and other downstream activities,” he said in his keynote address.

On the global stage, he said Fepo will be traded by international participants and can serve as a marketing platform to promote Sabah palm-related products and attract foreign direct investments.

Sarawak Chief Minister Datuk Patinggi Abang Johari Tun Openg said the Fepo contract would provide the state with some assurance that it will serve as a rebalance mechanism, allowing for a refined price discovery mechanism and options for physical delivery in Sarawak and Sabah.

“I am confident that this initiative will help to reduce losses to our oil palm industry in Sarawak and Sabah due to price differentials which are estimated at RM1 billion annually. I am also delighted that Bursa Malaysia Derivatives has (designated) Bintulu as one of the designated delivery points for the Fepo contract,” he said.

Strategically located to serve the main route of intra-Asian maritime traffic, he said the delivery point gives Bintulu some competitive advantages when exporting palm oil to major consuming countries, particularly those in North Asia.

“Besides, Bintulu has the biggest palm oil bulking installation facilities in Sarawak, and being the main export point for edible oil products, Bintulu handles 92 per cent of Sarawak’s palm oil exports. Surrounded by five major refineries and with dedicated palm oil jetties, Bintulu is indeed one of the largest Palm Oil Industrial Cluster (POIC) in Sarawak,” he added. — Bernama

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