CPO trading activities: Domestic market consolidation
This article has been translated by PwC Indonesia as part of our Plantation News Highlights service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.
Bisnis Indonesia - Aktivitas perdagangan CPO: Konsolidasi pasar dalam negeri
23 October 2023
By: Anitana W. Puspa, Aziz Rahardyan and Rahmad Fauzan
The presence of the Indonesian CPO Exchange, which was launched last weekend, was cordially welcomed by business players in the plantation and palm oil trading sector. They are ready to participate in trading activities on the commodity exchange.
On Friday (20/10), Indonesia Commodity & Derivatives Exchange (ICDX), which acts as the operator of the Indonesian CPO Exchange, facilitated the trading of the first physical crude palm oil (CPO) contracts through the exchange.
The first trading activity at the end of last week involved local CPO delivery to Dumai with an ISPO (CPOLDI) certificate of 100 tonnes at a matched price of Rp11,305 per kilogram through a Dutch auction mechanism.
Initially, ICDX targeted the first physical trading on the Indonesian CPO Exchange to take place today. However, it was carried out earlier.
Referring to ICDX data, 18 companies are officially registered on the Indonesian CPO Exchange. They include PT Wilmar Nabati Indonesia, PT Smart Tbk (SMART), PT Sampoerna Agro, and PT Bakrie Sumatera Plantation.
Fourteen other companies have expressed their commitment to participate and become part of the business players listed on the Indonesian CPO exchange.
According to PT Sampoerna Agro Tbk Head of Investor Relations Stefanus Darmagiri, the presence of the Indonesian CPO Exchange has an important role to optimise considering that CPO price fluctuations are often affected by various phenomena of global demand and supply of vegetable oils in general.
"However, in the future, with the existence of a CPO exchange, the hope is to identify a reference price for Indonesian CPO that is transparent, clear, and accountable on the global CPO market," he said to Bisnis.
Even though the issuer with the ticker code SGRO still focuses its sales at the domestic market, Stefanus sees that developments in the CPO exchange dynamics in the next few months will be very interesting to follow. Particularly to observe the demand trends from buyers with exporter status on the exchange.
"In general, the existence of this CPO exchange is expected to increase CPO transaction activities, so that, indirectly, it will also speed up the CPO export process," he said.
One of the big players in the CPO business, Sinar Mas Agribusiness and Food, ensures that it is ready to participate in trading activities on the Indonesian CPO Exchange.
According to Sinar Mas Agribusiness and Food Head of Corporate Affairs Harry Hanawi, since ICDX launched the CPO futures exchange, the company has joined as a member and carried out CPO transactions.
According to him, the Indonesian CPO Exchange that facilitates physical trade is still in its early stages.
He also hopes that there will be regular evaluations of the exchange so it can continue to improve its performance.
From the perspective of the Indonesian Palm Oil Association (IPOA) Head Eddy Martono, the majority of domestically produced CPO trade is carried out on a business-to-business (B2B) basis. In this scheme, the price is determined by the buyer.
"With the existence of the CPO Exchange, it is expected to provide price transparency. Because farmers still view that prices are not transparent [with the B2B system]. Now that there is an exchange, the prices should not stay the same," said Eddy to Bisnis last weekend.
For business players, he said that the exchange is expected to be competitive by not applying fees that are too high compared to other exchanges, as well as having simpler procedures.
According to Eddy, this is the initial appeal, both for buyers and sellers, to join and carry out trading activities on the exchange.
However, the Indonesian CPO Exchange is not a single organisation that can determine prices.
Eddy mentioned that the supply and demand conditions for other vegetable oil-producing commodities such as sunflower seeds and soybeans, as well as the global economic situation, also influence CPO prices.
"Therefore, do not think that, because we have our own exchange, we can we determine our own prices. It also depends on the prices of other vegetable oils and global economic conditions," he said.
He gave an example how, at the beginning of this year, the price of sunflower seed oil was higher than CPO due to abundant supply.
IPOA data shows that the price of NW Euro FOB sunflower oil reached US$2,500/tonne in the first quarter of 2023. Meanwhile, the CPO price on the Rotterdam Exchange did not reach US$2,000/tonne in the same period.
"So, do not expect the CPO exchange to be able to determine prices. Unless the market share of palm oil compared to other vegetable oil commodities is above 50%. It is only 33%," he said.
Transparency
Meanwhile, PT Garuda Berjangka analyst Ibrahim Assuaibi explained that the presence of the Indonesian CPO Exchange could help enforce transparency in CPO export taxation.
Until now, many export transactions have been carried out without going through an exchange, so that the amount of exports and tax payments is not properly identified.
This creates a gap and is exploited by market players to 'play' with unscrupulous customs officials.
"There could be significant changes in government income from taxes after the existence of the CPO exchange," he said on Thursday (19/10).
So far, he assessed that the market response to the presence of the CPO exchange has been quite good. This is proven by 18 palm oil conglomeration companies joining ICDX.
Moreover, he continued, with the government's policy requiring exports to go through the exchange, issuers operating in the core sector are encouraged to enter the CPO exchange.
In addition, the presence of this exchange also makes it easier to consolidate domestic market players. Investors wanting to buy shares of issuers in this sector can find comparisons more easily, especially to measure fundamental performance.
The enthusiasm to establish a CPO exchange is driven also by the strength of Indonesia, which is the largest exporting country in the world, so it is expected to create a good market price reference.
The government can also monitor CPO trade more easily, preventing fictitious and illegal exports.
Establishing a CPO exchange ecosystem is not as easy as imagined, especially related to pricing.
"Its presence is good, although to achieve the expected price reference, it will take another 10-15 years," he said.
Commodity analyst Wahyu Laksono reckoned the presence of a commodity exchange can provide benefits in terms of price discovery and hedging or risk mitigation, especially for physical commodity traders.
He believes that the presence of a CPO exchange in Indonesia should benefit farmers or local CPO sellers.
This exchange will later determine price agreements between sellers and buyers. Farmers or CPO sellers can also hedge risks. As a result, Indonesia will not be too dependent on exchanges in other countries such as the Malaysian derivatives exchange.
ICDX President Director Nursalam: Not everyone likes transparency
The launch of the Indonesian CPO Exchange is a breakthrough in improving crude palm oil (CPO) trading governance to strengthen the trading performance of this superior commodity. How does the outlook of the exchange look like in the future? Bisnis had the opportunity to interview the ICDX President Director Nursalam. The excerpt is as follows.
What is the role of ICDX in the CPO Exchange?
ICDX was established as a commodity futures exchange as mandated by law. We provide a system of facilities and infrastructure for commodity futures transactions.
By providing a transparent system, prices on the exchange are expected to be credible. The exchange does not intervene and only provides the system and rules for commodity transactions. We made it so that players can follow the rules approved by the government.
Regarding CPO [crude palm oil] commodity, Indonesia is the number one producer, but the price reference is in Malaysia. The idea of establishing this exchange is because we want to be sovereign in CPO trading.
We have received approval as the Indonesian CPO Exchange for local transactions. We hope that our prices would be credible, and the tools we have would be much fairer. Everyone who joins would believe in it, and in the future, it can become a world reference price.
Previously, what was CPO trading like?
Since 2010, ICDX has had CPO futures contracts. In the past, it was in paper form, but it can be delivered physically. In a futures contract, there are two options once it is due. You can hand over physically or settle in cash.
In line with developments, it has not lived up to expectations. Perhaps the players were reluctant. The players were also engaged a lot in Malaysia. Apart from that, there was no need yet for a paper or futures exchange in Indonesia. Because this contract is used for risk mitigation hedging. At that time, physical exchanges were not yet regulated and were still sporadic. Hedging was not needed yet.
Of course, playing physically has risks. What if the risk occurs? Then they will look for futures exchange hedging. We hope that the previous futures exchange can be revived with improvements and synergise with the physical exchange.
Maybe in the past the physical market should have come first, then futures. But instead, we made the futures market first. Hopefully, with the physical exchange, there will also be a need for hedging on the futures exchange. If both can run, it would be excellent.
For example, in Malaysia, their exchange is also paper based, not physical. Paper can be delivered. Indonesia is the only one that has a physical exchange.
What are the benefits of this CPO exchange for Indonesia?
Indonesia, as a global CPO producer, by having this exchange, can be all out, efficient, and credible. Prices on the exchange can be a reference for business players. Our goal for the future is that our exchange will serve as a reference for international CPO prices.
Once it becomes a transparent reference, oil palm farmers can calculate the price of FFB [fresh fruit bunches]. So far, farmers have not been able to calculate accurately because the reference does not yet exist. We present information that everyone can see. On the other hand, the government can also make the right policies. This exchange also provides big data. Volume, players, and prices can be used validly and in real time. Taxation is also expected to increase because it is transparent.
How does ICDX handle trading activities?
ICDX has also been used as a reference by the government as the price formula for calculating exports. Around 60% from ICDX, the rest refers to Rotterdam and Malaysia. Our hope is that if this CPO exchange can run well and be credible, the benchmark export price will refer 100% to us, no need to refer to Malaysia and Rotterdam.
What is the market response to the presence of CPO exchange?
The market response has been good, 18 companies have completed their administration to enter the CPO exchange, including existing and new ones.
Challenges ahead?
The challenge is the broad demographic, the ports are everywhere. Currently, Dumai Belawan has contracts. Port is the basis because palm oil activity ends at the port.
What about those in the east? Our future aim is to develop contracts in eastern Indonesia. Beyond that, it is settled on the block trade exchange. The agreement between the parties is registered with the exchange by fulfilling all the criteria set by the exchange. You cannot set your own price. The concern is underpricing.
Then another challenge is that prices are transparent on the exchange. Not everyone likes it. So, we must explain the benefits of better transparency so that prices are optimal. Or businesses are afraid that all their taxes will be visible. But I think taxes are now regulated so it would not be difficult for them. We are working with the government to formulate incentives that can be provided to attract people to join the exchange.
What is the difference between the Indonesian CPO Exchange and other countries?
Indonesia is the only one that is physical, the others are futures. Then, Indonesia is the largest producer, the market controller. If you can control it and have a marketing point, that means it is not a cartel, if you want to increase prices, do not sell cheap. If everyone sells at a higher price, the price will automatically be the same. Because we are a producing country that can move the prices.
If everyone is aware, this can provide added value because Indonesia's production is 50 million tonnes. Buying and selling can be done via the exchange so that data management and monitoring is easier.
