Presented by A.F.S.
International Rubber Study Group
The current world consumption of rubber, totalling around 18 million tonnes per year, consists of 48% natural rubber (NR), 20% solid SBR, 14% latex SB, 12% polybutadiene, 5% EPDM, 2% polychloroprene, 2% nitrile and 7% other synthetics. Thus, in terms of quantity by type, NR is still the largest.
Demand for elastomers, both for synthetic rubber (SR) as well as NR, is well secured and is continuously increasing at a rate of 3-4% per year, in line with improvements in living standards around the world. Synthetic rubber is purely an industrial raw material. The producing and consuming industries are in general closely related and dominated by large and global enterprises. Being a petroleum derived product and manufactured by polymerisation process in chemical plants, the management of supply against demand is relatively straightforward. To a certain extent, the prices of its basic ingredients namely the monomers are more or less influenced by the price of petroleum.
Natural rubber, on the other hand, is also consumed as an industrial raw material. In rubber articles, the two kinds of elastomers are never distinguished by us as users. It could be natural, synthetic or blends of various rubbers in different proportions. The manufacturer of these articles are basically choosing the kinds of rubbers to be used on the grounds of technological merit and economic availability. 70% of NR and 60% of SR have been manufactured into automotive tyres.
However, natural rubber is unique in the sense that it is consumed as an industrial raw material but produced as an agricultural commodity, and now over 80% being sourced from independent smallholders. Consequently, it becomes a social commodity where more than 30 million small farmers are at stake worldwide.
The global economic slow down has obviously affected natural rubber demand greatly, resulting in lowest ever market prices in the past 30 years. Reduced demand was exacerbated by increased supply from South East Asia, most remarkably from Vietnam which in the last six years had doubled its production from 155 0 00 tonnes in 1995 to 320 0 00 tonnes in 2001.
In an attempt to bring prices to a more remunerative level, three major producing countries, Thailand, Indonesia and Malaysia, covering over 70% of world production, had agreed to set up an International Tripartite Rubber Organization (ITRO) to manage sales and withhold stocks. The three countries agreed to cut exports by 10% as of 1 January 2002 in addition to cutting output by 4% in 2002 and 2003 through replanting, diversification with other crops and reduced new planting.
This joint action by the major producers, has suggested that natural rubber producers consider current prolonged low prices as no more sustainable. Previously, INRO which was a collaborative effort involving producers and consumers, was considered not effective by the majority of its Producer Members and was consequently dissolved in October 1999.
Natural rubber prices in 2001
(Excerpt from Dr P Jumpasut: Outlook for Elastomers 2001-2002, IRSG, with a few adjustments)
The year 2001 was a turbulent one for NR prices, with declines in all markets. Of the four prices tracked, Thai RSS 3 fell by the biggest margin, while, surprisingly, Indonesian TSR 20, as proxied by New York TSR 20, fell by the smallest margin (Figure 1). However, the year closed with a recovery at the onset of the rainy season, the advent of wintering in Southeast Asia and the setting up of the International Tripartite Rubber Organisation (ITRO) attempting to curtail supply to the market. The overall downward trend was the result of an imbalance in the rubber industry, which towards the end of the year was made worse by the actions of the intervention scheme of Thailand. Weather, seasonal factors and currency movements, however, ensured a brief interruption to the downward trend. The short-term price rally was most visible between late-March and mid-July. One of the features of 2001 has been the resilience of the Indonesian rubber price to downward pressures as it established a floor early in the year.
Figure 1: Physical prices, 1 Jan '01-21 Jan '02
During mid-December 2001 to the third week of January 2002, Sumatra, the main rubber producing area of Indonesia, have been suffering from heavy rain and resulting floods. Wintering is fast approaching the region, which would interrupt rubber supply reaching the market. The combined effect would be a possible temporary shortage in the market. However, judging from the rate with which prices rose, the latest price rally benefited from the conclusion of the ITRO. It is unlikely that the current rate of climb could be sustained for any length of time, although the level may be sustained with wintering approaching. Furthermore, some of the major automobile manufacturers have planned to boost their production in the first quarter of 2002 as a result of low inventories, which would also aid price level stability.
Factors influencing NR prices
The fundamental factors influencing NR prices are demand and supply, while all other factors have indirect effects through changes in the fundamentals of demand and supply. For example, an improvement in the world economy leads to an increase in rubber demand, a decline in the price of NR relative to SR influences a falling share of SR in total rubber consumption, and a weak Indonesian Rupiah relative to currencies in other producing countries encourages an increase in exports and output from Indonesia and hence a rise in world NR supply. Changes to the stock situation provide an indication of the relative tightness of the rubber market. Tightness in the rubber market provides upward pressure on prices and vice versa. Important factors in the long term include technological innovation, economic development, etc. In the medium-term, i.e. 2-3 years ahead, rubber prices depend mainly on the cyclical movement of the world economy. Then there are fluctuations along this gentle phase of the rubber cycle, influenced by various short-term factors such as weather, currency movements, futures markets activities, market interventions and irregular demand. The forecasts of output discussed above, particularly for NR are produced, assuming that no extraordinary events occur in producing countries. Furthermore, the forecasts are based on production and export controls in producing countries such as replanting, chopping trees, switching to other crops or tapping suspension, have not materialised to a large degree.
How low were rubber prices in 2001? First, let's examine RSS1 prices in New York and London since 1900 as shown in Figure 2. It can be seen from the graph that annual average prices in both markets improved in 2000 before falling again in 2001. Now, comparing 1999 and 2001 (two separate years of falling prices) we find that the average London price in 2001 is 469.8 £/tonne, which is a slightly higher than 446.4 £/tonne, the average for the whole year of 1999 - the lowest levels since 1975. However, New York prices, for the same period are lower at 746.5 US$/tonne in 2001 compared to 808.2 US$/tonne in 1999, but 2001 prices are still higher than the average price of 658.9 US$/tonne in 1975. So one can say, in New York at least, that rubber prices are now at their lowest levels for about thirty years.
Figure 2: RSS1 prices in New York and London, 1960-2001
However, in real terms, the extent of the fall in rubber prices is even more dramatic. Figure 3 illustrates RSS1 prices in US$/tonne deflated by the US consumer price index (1990=1000). In real terms, the rubber price has fallen from over 2,500 US$/tonne in 1960 to just over 600 US$/tonne, in 1990 values. Judging by this, NR producing countries are worse off than ever, with prices having been following a continuous downward trend over the past forty years.
Figure 3: US RSS1 price deflated by 1990 US consumer price index, 1960-2000
The effects of currency movements
Changes in relative exchange rates can affect rubber prices directly or indirectly. The direct effect stems from the fact that NR is normally purchased from one country in a given currency for use or resale in another country with a different currency. Any change in the value of the exchange rates can affect the price in the purchasing country without any change in prices in producing countries taking place. The indirect effect comes from arbitrage activity and speculative demand, which can be either commodity speculative or foreign exchange speculative. The short-run or the immediate impact and the long-run effect when quantity demanded and supplied adjusts to the price change must also be distinguished. In the short-term, rubber prices could increase or decrease depending on movements in currencies. This type of change in prices only has a nominal effect i.e. no immediate effect on the demand and supply of rubber. In a 'perfect world', if prices vary among markets when converted to the same currency, arbitrage is likely to take place. However, in the longer term the change in currency may result in an increase in demand and/or supply of rubber. Although this has become less significant, in theory a rise in the NR price may lead manufacturers to substitute SR for NR and vice versa. At the same time, the increase in prices may influence producers to tap more rubber and increase supply.
Our study indicates that in the short-run a 10% decline in £/Ringgit or £/US$ leads to about a 2% rise in the London price, a 10% rise in the US$/Ringgit leads to only less than half a percentage fall in the New York price, and a 10% appreciation of the US$ to SDR leads to a rise of 2.5% in an average of rubber prices, such as the International Natural Rubber Organisation's (INRO) Daily Market Indicator Price (DMIP) we used to have. In the long run, a 10% appreciation of the US$/SDR rate resulted in a decline in the average prices in New York, London and Kuala Lumpur by more than 30%. Figure 4 below illustrates the trend of the price of RSS1 in Malaysian Ringgit and US$/SDR rate from Jan '92-Oct '01. The long-term impact of the movements in the exchange rates can be clearly seen. The depreciation of the US$ led to the sharp improvement in the rubber price and vice versa from 1995 to present. Using an average of rubber prices gives rise to similar results.
Figure 4: Rubber price and currency movements
The reason for using the US$/SDR rate is because the US dollar is generally considered to be the main currency used in rubber trade and the SDR rate, which is determined by a weighted basket of currencies, can be used as a proxy for the rubber consumer currencies. It is interesting to note that about 20% of the appreciation of the SDR since the peak of rubber prices in early 1995 has led to a decline of almost 60% in the rubber price. The currencies of NR producing countries, Thailand, Indonesia and, until recently Malaysia, have all weakened against the US dollar in the past three to four years. This implies that farmers and exporters in the three countries have been receiving higher income, in their own currencies, without any change in rubber prices or even with a decline in prices. The currency factor was clearly demonstrated in the post-Asian crisis era of 1997-98, when output increased sharply despite the absence of increasing demand and declining rubber prices in dollar terms. A strong dollar also makes rubber more expensive in the dollar-denominated export market and normally leads to higher prices in consuming country's currencies, e.g. the yen. Rubber is, however, not the only commodity that is affected by currency movements, plotting the trend of the US$/SDR rate and general raw material prices give a similar picture.
How can we expect the US dollar to behave in the coming year? In 2001, the US economy was weakened and the US dollar was expected to depreciate. It weakened somewhat, but still remained relatively strong. Using a trade-weighted index, in December 2001 the dollar was at its strongest since September 1986. So what about 2002? The dollar is expected to appreciate against the yen, partly because the Japanese economy is in recession with no real recovery in sight. However, since the September 11 attack and the 5.75% cut in interest rates, some experts believe the US$ will depreciate. Foreign investments coming into the US through the purchase of US stocks are likely to decline, which will mean lower demand for the US$. In any case, foreign money has been supporting the large US trade deficit for far too long and it is about time that the US$ lost ground in order to aid exporters. Furthermore, the large US current account deficit is unsustainable and, at some point, market confidence in the dollar will collapse, harming the economy and the markets. If the dollar does fall, the long-term consequence for rubber prices would be the opposite from what we have seen in the recent past, i.e. rising rubber prices.
NR stocks and prices
Of course, currency alone will not produce a long-term change in rubber prices. As always, the fundamental factors influencing rubber prices are demand and supply, and hence stocks. Natural rubber prices have been on a declining trend since 1995 as a result of global stocks rising to a historical high and it is only in the past two years that they have begun to taper off. Apart from currency factor, the increase in productivity in the three main producer countries has also added to the problem. NR production in Thailand, for example, has been increasing substantially through the implementation of accelerated rubber replanting with high yielding clones. Furthermore, market intervention, e.g. in Thailand, has also lifted local rubber prices artificially higher, resulting in output that is greater than that dictated by demand.
Let's look at the NR market in Figure 5 as an example, which shows the New York TSR 20 price measured in US$ per tonne and the annual moving average of global NR stocks in thousands of metric tonnes. As is evident, the decline in stocks in 1993-94 led to a rise in rubber prices. The relatively sharp rise in prices during this period was intensified by other factors, particularly speculative activity in rubber futures markets. The long run rise in rubber stocks led to a continuous fall in rubber prices during 1995-99. Then, when stocks were about to reach the peak towards the end of 1999, prices rose again. This is exactly the situation one would expect in a normal market. The puzzling period has been 2000-01 when the decline in world stocks has not led to a rise but rather a fall in prices.
Figure 5: World NR stocks and rubber prices
Keep in mind that stock figures, as shown here, already take into account the possible underreporting of output, which begs the question, what is causing prices to fall? One answer might be that global NR production and stocks are still being underestimated in countries like China, Vietnam and perhaps, in Indonesia. The IRSG Secretariat is currently investigating issues pertaining to the reporting of production, exports and stocks, with the help of national authorities.
Prices and market intervention
Thailand currently operates an intervention scheme with the objective of supporting the price received by rubber smallholders. This price support scheme has apparently achieved its objective but at a very high cost, partly borne by the Government of Thailand and partly by the domestic processing industry. In particular, the present scheme to provide floor-price at levels which satisfy the farmers is likely to be very expensive to carry out in the prevailing weak market conditions.
In 2001, Thailand decided to extend the price intervention scheme until the end of 2002 and with the decision to sell from the stockpile. Sales from the stockpile created greater problems for the market and rubber prices than the intervention scheme, as rubber was repeatedly sold below the prevailing market price. In the last seven month of 2001, the REO had released an estimated 130 000 tonnes of rubber, including the 50 000 tonnes negotiated and sold under a government-to-government deal with the People's Republic of China. With the recent spate of borrowing, over the past five months the rubber authority has taken 6.3bn Baht of loans in total. As a result, the REO has sufficient funds to continue the current price intervention scheme until its scheduled end in December this year. REO stands for Rubber Estate Organization, the Government agency appointed to conduct the intervention scheme.
On 11 December 2001, three Ministers representing Thailand, Indonesia and Malaysia had completed its meeting of the ITRO that began back in July 2001. The meeting, which was held in Bali, Indonesia, plans to cut output and exports by 4% and 10%, respectively, beginning 1 January 2002. The aim of ITRO is to reduce rubber output by 4% starting from this year. This would mean that potentially approximately 181 000 tonnes in production and about 374 000 tonnes in exports would be withdrawn from the rubber market in 2002. This compares well to more than 900 000 tonnes of rubber purchased by the Thai government during their intervention programme (1992 - Present) and over 700 000 tonnes purchased by INRO during the three International Natural Rubber Agreements since October 1980. The reduction in output will reduce global stocks, ceteris paribus, which should have a positive effect on rubber prices. One can safely say that the actions taken by INRO and the Thai government have not lifted rubber prices permanently. History has shown that intervention is most effective at the beginning of an economic recovery, which results in the greatest increase in demand. So the question of whether rubber prices will increase in 2002 with the 4% reduction in output depends, partly, upon the outlook for global rubber demand.