Uncertainty in global rubber markets

Violent fluctuations in the prices of Natural Rubber (NR) have now become a regular phenomena. Galloping prices have always been followed by turnarounds as expected in a free-market economy. NR has been going through a period of wild market fluctuation in the recent past, from as high as Rs 400 (U$4) per kg, down to about Rs.180 (U$1.8) per kg which however, is still remunerative to growers but is the biggest challenge to the consumers.

Weather
Under normal circumstances, the market in known to fluctuate depending on supply / demand balance. The swings noticed in the recent past with prices falling by about 30% over the past three months, can be traced back to the unexpected changes in the weather pattern. The southwest monsoon started with intensity towards the end of May but weakened in a few weeks. This dramatic change in the weather boosted production. Again prior to the onset of the northeast monsoon by the middle of October, there were heavy rains that disturbed crop harvesting. Rubber has proved many times in the past that even marginal changes in the supply chain can put pressure on prices. Rubber prices may still continue to stay around U$1.80 per kg, but there are growing concerns over its drastic fluctuations as both the growers and consumers are equally affected.

Crude oil prices
Fluctuating crude oil prices can also continue to remain as one of the worries. The decline in the crude oil prices from the peak of U$78 a barrel a few months ago to around U$60 towards September / October spurred selling of rubber from major dealers as a decline in oil prices often brings down the price of SR with ramifications on NR prices as well. Now, again with the gradual rise in crude oil prices, the demand for NR will also increase because tyre manufacturers who use SR are likely to switch over to NR to meet the costs of production and raw material supplies. In such situations, the worst affected will be the rubber products sector industry, in particular those without proper and or established supply chain and distribution channels.

Only the big players will have the advantage of economies of scale and are able to pass the bulk of the increases in price to customers. The long - term effects of violently fluctuating NR prices will also have its effects on down stream users while manufacturers may need time to adjust to such rapid changes in prices and the inevitability of transferring the changes to customers.

It is an uphill task for medium and small scale rubber products enterprises to stay in business in this situation. Only the large scale and more efficient with well established marketing network will remain while the smaller ones will have to either merge themselves into larger units for economies of scale or be acquired by the large scale players or forced to go out of business.

Global NR/SR share
A contrasting trend was reported for 2006 in the matter of NR and SR consumption, mainly on account of price differences, with year- on year growth rate of NR consumption falling from it’s peak of 8.9% to 1.2% while SR climbed from 0.7% to 2.7%. Both NR and SR stocks worldwide are on the rise but with the NR production going up and consumption going down fast, the deficit of about 74,000 tonnes that prevailed at the end of 2005 has since turned into a marginal surplus of about 29,000 tonnes of NR. In the case of SR however, since the demand for SR is currently more than the supply, it has been reported, that the overall surplus, has come down to about 29,000 tonnes as of July 2006. SR has the advantage of being possible that its supply can be adjusted to demand, unlike the perennial tree Hevea.

Globally, speculation is very high in futures trade; more than a million tonnes rubber is normally traded everyday, but the physical delivery is much lower, sometimes even less than 5%. Hedge Funds have turned out to be the movers of future markets.

Another factor in price fluctuations is payment default. Singapore trading circles speculate that payment default of rubber bought by a number of small rubber traders and consumers, engineered the 37% price crash recently.

These are some extraneous factors that created price volatility, over which there appears to be very little control. When the NR market is on a declining trend, the fund managers move out of rubber and invest in other commodities where the margin of profit is higher. China’s Shanghai Futures Exchange (SFE) and Japan’s Tokyo Commodity Exchange (TOCM) are two highly speculative markets in Asia rubber and these markets normally set the trend for the global rubber markets.

In the meantime the boom in rubber prices has had its positive impact on the lifestyles of rubber small holders who are now able to harvest reasonable profits for a decent living. Higher output of rubber motivated by higher prices is the only contributory factor.