The elasticity of rubber economics

The elasticity of rubber economics
CASH CROP: Replantation of rubber estates undertaken by various countries is likely to give a push to rubber production
IRSG (International Rubber Study Group) studies forecast global rubber production of 13.6 million tonnes (mt) by 2020, when consumption is expected to reach 13.1 mt. Replantation of rubber estates undertaken by various countries is likely to give a push to rubber production. India is expected to produce 918,000 tonnes of rubber in 2009-10, up from 874,000 tonnes in 2007-08, while consumption is expected to increase to 922,000 tonnes from 853,000 tonnes, according to the Indian Rubber Board. Thus, on fundamentals, supply is expected to exceed demand. According to Hidde P Smit, secretary general of the IRSG, an inter-governmental body monitoring the global rubber industry, growth in total rubber consumption is expected to decline to 2.6 % in 2008 from 6.4 % in 2007 in the backdrop of what he describes as looming global recession.

The dwindling fortunes of the automobile industry have had their impact on rubber prices. According to Abdul Aziz Kadir, secretary-general of the International Rubber Research and Development Board, 85 per cent of the rubber production goes into making tyres. It has been seen that rubber prices closely track oil prices. Of late, lower crude prices have led to cheaper prices for synthetic rubber made from crude oil, thereby causing natural rubber prices to fall in sympathy. A sharp retreat in the rubber prices in the first week of October 2008 was a result of the Hari Kaya public holidays and news of troubled banks in Europe as well as the prolonged sub-prime crisis in the United States. Falling world stock markets and fears of a global recession forced Asian rubber futures on Friday, October 11, to their lowest levels in nearly two years.

Thailand, Indonesia and Malaysia, the world's top three rubber producers (they control over 80% of the world's natural rubber output); have decided to meet in December to coordinate efforts to arrest the decline in rubber prices. They will also discuss stockpiling efforts as the downturn in the automobile industry has impacted demand for rubber.

In India, the markets of Kottayam and Kochi have recently witnessed frenzied selling. Prices of RSS-4 grade sheet rubber are at a seven-month low. The growers are skeptical as domestic rubber production will be at its peak during the October-January period, courtesy favourable weather and active tapping of plantations. After Onam holidays, tapping of plantations had picked up and during the last couple of weeks, almost 30,000 tonnes were produced. Tapping comes down substantially during the monsoon rains as latex flows decrease when the trunk is damp. With the recommencement of tapping season, plenty of carryover stocks are being seen. Nevertheless, global economic woes have put paid to the hopes of rubber growers for higher prices.

The steep rise in the synthetic rubber prices during the past 12-16 months was a major reason for the sharp rise in the prices of natural rubber. There was an increased consumption of natural rubber owing to the high price of synthetic rubber, which was almost double the price of natural rubber. In India, the government had, in the face of escalating rubber prices, banned futures trading in rubber for four months. Sajan Peter, Rubber Board chairman, believes that rubber growers did not rely on the futures market to price their crops. The ground reality is that traders and growers do rely on international prices to decide whether to hold or sell, and futures markets do have an impact on their decisions.

Cheaper crude has made synthetic rubber more affordable. Synthetic rubber is a by-product of petroleum refining and a direct substitute for natural rubber in many products, including automobile tyres.

In Thailand, production is now around 30 % higher than in late June when prices had spiked, whereas Malaysia, the world's third largest producer, is also entering its peak production season. Thailand produces around 3.1 million tons of natural rubber a year. Prices usually ease slightly during the peak output season, which in turn brings buyers back into the market. However, frail state of the global economy (however transient the state may be) is acting as a deterrent.

Rubber prices had been pushed up by speculative interests, so a correction has taken place, which has brought back the market in line with supply and demand. In the longer term, most market observers believe fundamentals will become the focus again when the current speculations subside. Continued growth in emerging economies could help offset the slower growth in the developed world. The fall in demand from rubber industry's major consumer, the automobile industry is also only transient. As world growth revives, assisted by the concerted effort of central banks to cut interest rates and boost growth, and as more fuel-efficient cars begin to appear, we could see the sagging fortunes of the automobile industry revive. This will also lead to a revival of demand for rubber with concomitant rise in its prices.

The writer is the CEO of Global Capital Advisors. Financial Chronicle does not warrant the quality or accuracy of the article. It shall not be deemed a recommendation by FC for buying or selling or investment of any kind. Investments are subject to market risks. Past performance does not guarantee future success. It is advisable to seek advice from a qualified independent adivsor before investing)

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