Bursa Malaysia Derivative is set to launch a new crude palm oil (CPO) futures contract specific to East Malaysia, where the states of Sabah and Sarawak contribute almost half of Malaysian CPO production and have long complained that the FCPO benchmark contract disadvantages them since price discovery is based on infrastructural factors and delivery points in Peninsular Malaysia – which can be very different if the cargo originates from Port Klang in the peninsular or Lahad Datu in East Malaysian state of Sabah. The FEPO (East Malaysian Palm Oil Futures) contract aims to provide a rebalance, allowing for a refined price discovery mechanism and options for physical delivery in Sabah and Sarawak.
According to Bursa Malaysia, the FEPO mirrors almost all of the FCPO’s current specifications, with some enhancements specific to East Malaysia offering delivery through three ports. They are Sandakan, Lahad Datu and Bintulu. Sandakan and Lahad Datu accounted for 10.57% and 12.37% respectively of total export volume in 2020—MPOB data showed. There was no data available for Bintulu. China made up the main export destination for vessels plying from East Malaysia to the tune of 31% followed by India 13% in 2020—according to ITS data.
This should rectify complaints that East Malaysian palm oil is sold at a discount to FCPO while incurring higher freight costs due to the larger distance, resulting in the Sarawak Oil Palm Plantation Owners Association estimating that the two states lose some RM1 billion (US$241.7 million) annually due to price differentials. The FEPO could have the potential to rival FCPO given the large scale of production from Sabah and Sarawak (and also of international interest, given the FEPO trading hours, will start at 9 am SG/MY time instead of 10.30 am to align with trading hours in China).