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Palm Oil E-Trading Will Begin on June 28

The government will launch electronic trading of crude palm oil on the Jakarta Futures Exchange on June 28, with an aim to become the world’s global reference price for CPO and its derivatives.

The new market, envisioned as the first step to include futures trading and other indexes, will use the Indonesian price as the benchmark, Bayu Krisnamurthi, the deputy minister of agriculture and fisheries at the Coordinating Ministry for the Economy, said on Friday in Jakarta.

The market would also provide information on prices in other commodities bourses, including Rotterdam, Kuala Lumpur and the Sumatran port city of Belawan, as well as private companies’ auction prices.

“We will use the Indonesian price as a reference and to set export tariffs,” Bayu said. “We will provide all facilities step-by-step in a very short time.”

Indonesia is running well behind Malaysia, which operates the world’s most active market, trading as many as 20,000 futures contracts a day. Earlier this month, Bursa Malaysia launched three new indexes to track the performance of listed companies. Given the size and sophistication of the Malaysian market, it remains to be seen how quickly or effectively Indonesia will be able to compete.

Derom Bangun, vice chairman of the Indonesian Palm Oil Council, cautioned that in the beginning, it would be difficult for Indonesia to entice buyers to use its price and currency as a reference, but said it was a risk the country had to take if it wanted to control CPO pricing.

“Malaysia, as the world’s second-biggest CPO producer, has commodity trading and price references. Why can’t we do that?” he said on Friday.

Indonesia now references prices in Rotterdam and Malaysia, with trading denominated in US dollars and Malaysian ringgit, Derom said. “Our rupiah fluctuates against the dollar. Rupiah transactions can stabilize our currency,” he said.

The physical market must be in place before futures trading can begin, Bayu said. “We will involve the private sector in trading and some [traders] are already committed to trading on the physical market.”

The Kuala Lumpur market, Bayu said, is supporting the new Indonesian bourse. “There will be a memorandum of understanding between the Kuala Lumpur and Jakarta markets to cooperate on CPO trading, sharing information and arranging technical issues,” he said.

The new market is expected to benefit local palm oil farmers by giving them more realistic price references to sell their fresh fruit bunches, he said, with price fluctuations taking place within the country in rupiah, Bayu said.

Armed with such information, price transmissions from markets to farmers would be faster, he added. “It will reduce speculation since all transactions will be carried out in rupiah,” Bayu said. However, he said, the market will take time to react to the new pricing mechanism.

Derom also urged the government to develop several eastern harbors for CPO exports. The country currently only exports the commodity from two ports. “At present, all CPO originating from Kalimantan and Sulawesi must be sent to Belawan or Dumai,” he said. “The long journey can reduce its quality and affect the price.”

Indonesia and Malaysia together contribute 85 percent of world’s CPO output, with Indonesia producing about 17.5 million tons and Malaysia 16 million tons in 2008.

Soedjai Kartasasmita, chairman of the Indonesian Plantation Entrepreneurs Association (GPPI), said that to support the new physical exchange, all traders must report their trade data each day to Jakarta. The data would then be used to measure the average CPO price in Indonesia.

“However, the problem is that traders in Indonesia are not used to reporting their trading value and volumes to ‘outsiders,’?” he said on Friday.

Another challenge was Indonesia’s vast spread of palm oil plantations, from Aceh to Papua, he said. “We have to consider the availability of communication equipment to transfer data from each province to Jakarta.”

Published on Jakarta Globe May 30, 2009

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