On November 20 the RBD palm olein futures on the Dalian Commodity Exchange (DCE) was approved by the China Securities Regulatory Commission (CSRC) to open to overseas traders from December 22. RBD palm olein futures therefore has become the seventh domestic futures product and also the first listed agricultural futures product that is approved as specified product. Industry professionals believe it to be another important move to open up China’s futures market to the outside world and serve global industrial enterprises, a move to consolidate the fruits of opening up and effectively enhance the global pricing power of China's futures market.
According to industry information, among all the vegetable oils, palm oil is the one with the largest global output and international trading volume. The main production areas are Southeast Asia and Africa. Global palm oil production exceeded 70 million tons in 2019, accounting for about a third of global vegetable oil production. Global palm oil consumption arrived at about 71 million tons in 2019. China, currently the world’s second largest importer and third largest consumer of palm oil, is completely dependent on import for palm oil. China’s palm oil consumption reached 6.4 million tons in 2019, 60% of which imported from Indonesia, and 30% from Malaysia.
RBD palm olein futures, which was listed in 2007 on DCE, is China’s first futures product for only imported commodities. Since RBD palm olein was listed, its futures market operated steady and effective, making DCE the world’s largest RBD palm olein futures market. According to statistics, from 2009 to 2019, the annual trading volume of RBD palm olein futures was among the highest in China’s agricultural futures market for years. Trading volume in 2019 arrived at 135 million lots, or 1.35 billion tons, and the average daily open interest hit 420,000 lots, or 4.2 million tons, ranking third among agricultural products futures in terms of trading volume. Calculated on a comparable basis, it was 5.77 times the trading volume of Bursa Malaysia Derivatives (BMD). In the first half of this year, RBD palm olein futures on DCE ranked second in the global trading volume of agricultural futures and options, with a growing influence.
The RBD palm olein futures market operation and development showed that the futures and spot markets of RBD palm olein have a good correlation with the international market, and the industry has shown a strong demand for internationalization and the product is well prepared for it. It is reported that palm oil companies accounting for more than 85% of total import have used futures for hedging. RBD palm olein futures is relatively fully used by large Chinese oil enterprises and all multinational grain and oil enterprises operating in China for hedging, turning itself an indispensable tool in risk management for these companies. RBD palm olein futures and spot price correlation coefficient is up to 0.99. In China, 70% of palm oil spot trade use the price of RBD palm olein futures on DCE for basis pricing, making RBD palm olein futures the pricing benchmark of spot trade in China, with a profoundly influence on the international market.
Market participants generally share the view that RBD palm olein futures, after being open to overseas traders, will be DCE’s first agricultural product futures open up to the world. As a significant step in the internationalization of China’s futures market, it will further improve the ability and level of China’s futures market to serve the global industrial chain.
As for its ability to serve the industry, the futures market for RBD palm olein, which is an only imported commodity, will build up a connection with its production, processing and consumption links after the market’s internationalization. Overseas enterprise clients can participate in both BMD and DCE market, which will better meet the hedging needs of domestic and foreign enterprises engaged in the production, processing and trading of palm oil. Also, the internationalization will help with the formation of a complete industrial risk management chain, and contribute to the steady growth of the Belt and Road Initiative industrial cooperation.
For the futures market, the participation of a growing number of overseas enterprises specialized in palm oil processing and trading will push the in-depth integration of domestic and foreign futures and spot RBD palm olein markets. In addition, the move will contribute to the liquidity of near-month contracts and continuity of dominant contracts of RBD palm olein, improve the operation efficiency and liquidity of the market, bring about optimization of market structure, improve market operations and development quality, and contribute to an improved international pricing power of RBD palm olein and the internationalization of the RMB.
The spokesman of DCE said that in 2016 DCE started the internationalization project of RBD palm olein futures. Since then, DCE carried out survey on domestic and foreign markets, made continuous improvement according to the opinions of all parties in the market, and formed a plan for internationalization that is widely accepted by the market. After its internationalization, the trading, settlement, and risk control of RBD palm olein futures will be performed in the way iron ore and other specified futures products are done currently. And the existing contract and basic rules will remain unchanged, so will the core technology system, the core clearing and risk control mode. At present, DCE is actively getting things ready for overseas traders to participate in the RBD palm olein futures, striving for the smooth entrance of overseas traders and securing steady operation of the market.
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