Are Industry People Experts ? Something On Sime Darby

For some strange reasons we tend to think of those people in a particular industry would be know-it-all about that industry. Eg: we think our bankers/stock brokers/fund managers would know about financial markets more than us. A few of my friends also think people who are from plantation companies would know all about CPO price movement. The following old story about Sime Darby should break that myth. And over the years I have heard similar 'horror' stories of big plantation companies' misadventure in the CPO futures market and FX markets (they need those to hedge their exposure in their exports ):-

Sime Darby's RM120m loss: Trader goes missing

KUALA LUMPUR June 12, 2008 : Sime Darby Bhd's RM120 million futures trading loss may have been the work of a single rogue trader who made the wrong bet and was poorly supervised.

Existing and former company officials said the trader in question has since quit the company.

Sime Darby has declined to comment on the matter. The trader could not be contacted.

On Tuesday, Sime Darby fired two top executives after carrying out an inquiry into the trading losses at Golden Jomalina Food Industries, a subsidiary of Golden Hope Plantations Bhd.

Golden Hope has since last year been merged with Kumpulan Guthrie Bhd and Sime Darby Bhd.

Company officials said the trader was one of 20 to 30 futures traders employed by the company to sell Golden Hope's premium crude palm oil (CPO) in the open market to make a higher profit.

The company then buys standard quality CPO from the open market at a lower price so that it can make a better profit margin when used at its oleochemical division. That division processes CPO into value-added products like cooking oil, detergent and soap.

This is a normal practice by almost all plantation companies in Malaysia to protect themselves from the vagaries of CPO's fluctuating price.

"However, he made a mistake by betting against the market since the end of 2006 by locking CPO's selling prices at more than RM1,000 a tonne, thinking prices would go down.

"Until August, however, CPO prices more than doubled and he tried to cover up the losses by counter trading but was unable to do so. As a result, the company accumulated trading losses right until the run-up to the merger late last year," one of the officials said.

Realising the loss, the rogue trader who has been a Golden Hope staff for 10 years, left without giving notice. Officials said attempts to locate him failed as the address listed in the company's records turned out to be bogus.

A former official said futures traders were poorly supervised. For instance, they did not have a limit that stopped them from trading when a certain level of loss was incurred.