Rubber: who will bite the bullet?

China , Indonesia , Japan , Malaysia , Rubber , Thailand May 11, 2014 1 Comment

RubberNatural rubber prices have fallen by more than 30 % since the beginning of the year. This past week, global rubber prices tumbled towards their weakest in more than five years, as Thailand, the world’s top producer, plans to clear the stocks it had purchased from farmers to support prices. Benchmark Tokyo rubber May contract futures sank more than 3% on Friday.

Thailand plan would undermine efforts by Malaysia, Indonesia and… Thailand – three of the world’s top exporters – to halt a price plunge that is hitting farmers and worsening the financial drain on Bangkok from agricultural subsidies. The International Rubber Consortium (IRCo) appears hamstrung by a lack of cash and political will.

The natural rubber price decline is not just a function of demand fears, traders are also fretting over excess supply. Thailand had planned in April to sell about 200,000 tonnes of rubber during the wintering season, when latex output drops. No sales were made, although the Thai agriculture minister said on Wednesday the government is still going ahead with the plan despite opposition from farmers. “The rubber stocks have been kept for such a long time and they have deteriorated. The longer we keep them, the bigger the losses will be. There’s no point in holding them further,” Yukol Limlaemthong told Reuters.

Thailand‘s government is in caretaker mode, Indonesia is in election mode. I don’t think anything will move now. These are the two major players that have to call the shots,” said the official, who declined to be identified due to the sensitivity of the issue.

Indonesian officials suggested that Thailand should take the lead in any proposal, but the ousting of Prime Minister Yingluck Shinawatra has deepened the country’s six-month long political crisis.

“I am not blaming Thailand, but it is the biggest rubber producer. Funding has become a problem because Thailand can’t give its commitment when the government is in a transition,” said Indonesia‘s trade minister Muhammad Lutfi.

Dealers said Bridgestone Corp, the world’s largest tyre maker, bought SIR20 late on Tuesday at 75.25 U.S. cents a pound ($1.66 a kg) for July. Deals were also struck among trading houses at $1.67 a kg for June, down sharply from last week’s traded prices of $1.76 to $1.79.

Inventories in China, the biggest rubber consumer, are at a nine-year high, according to Bloomberg, raising the prospect of a deepening global glut for the commodity used to make tires. Vehicle demand in China, the world’s largest car market, has slowed as anti-pollution and austerity campaigns spread. Another factor possibly depressing Tokyo futures is that they are denominated in yen, which has been stronger of late.

The Singapore-based International Rubber Study Group has predicted an output surplus of 428,000 tonnes this year, as stockpiles in major consuming countries including China and Japan are high already. Global natural rubber stocks are estimated to rise about 10 percent to 3.21 million tonnes at end-2014, about 27 percent of global output. Stocks in Thailand, Indonesia and Malaysia are estimated by the Association of Natural Rubber Producing Countries at about 715,000 tonnes.

“The only thing that can stop the rubber price slide is for world stocks to get depleted and demand starting to outstrip supply,” said a dealer in Singapore.

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

One Comments

  1. It would be interesting to know how to hedge against future increases of rubber prices in USD (without buying Futures contracts in Tokyo). Do you have any recommendation?
    Thank you for posting
    Robert Main

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