Domestic natural rubber prices have been cooling off for about a year now. At the Kottayam and Kochi markets in Kerala, the major rubber producing state in the country, prices of natural rubber (RSS 4 variety) are hovering at around ₹120-130 a kg currently. This is about 30-35 per cent lower than the ₹185 per kg levels that prevailed a year ago. Natural rubber prices in India today are also the lowest since the elevated levels of ₹200-240 a kg seen in 2011.

Why prices dropped A slowdown in demand from China, one of the biggest consumers of rubber, along with oversupply in the global markets from countries such as Thailand, sent international rubber prices spiralling down in the last one year.

While this factor did influence domestic prices to an extent, lower demand at home too has been one of the reasons for domestic prices softening. Data from the Rubber Board shows that natural rubber consumption in India grew by a mere 0.9 per cent to 9,81,520 tonnes during 2013-14 from 9,72,705 tonnes in 2012-13. It continues to remain weak this fiscal too.

Considering that about 65 per cent of consumption is from the auto industry for the manufacture of tyres, the slowdown in vehicle sales brought down the demand for rubber. Overall vehicle sales grew by a weak 3.5 per cent in 2013-14 over the previous year. Bigger consumers such as trucks and buses saw as much as 20-25 per cent decline in sales volumes. These trends have predominantly continued into the first few months of 2014-15, although some pockets of growth in auto sales are visible more recently. Secondly, some part of the need for rubber was met from imports, denting demand further for domestic produce.

This is because international prices, represented by the prices prevailing in Bangkok, were lower than domestic prices for a good part of the last one year for reasons mentioned above. Hence, despite production hiccups, such as interrupted tapping due to prolonged rains, high wages and reduction in yield per hectare, lacklustre demand from user industries and lower international prices kept domestic rubber prices down.

Outlook The latest available data (until May 2014) from the Rubber Board continues to show lower consumption and higher imports during the current fiscal. Low domestic prices, in turn, have resulted in a vicious circle, keeping production low in April and May.

But the Rubber Board estimates the country to produce 9,50,000 tonnes of natural rubber in 2014-15, showing 12.5 per cent growth over 2013-14.

This augurs well for the expected pick-up in economic growth this year as the demand situation may improve. Some green shoots are already visible in auto industry sales, which have grown by 11 per cent in April-July 2014, compared with 3.5 per cent in the 12 months ended March 2014.

Globally, signs of increase in natural rubber consumption were visible in the April-June 2014 quarter, going by data from the International Rubber Study Group. The Group also forecasts world natural rubber demand to increase by 4-5 per cent in 2014, pushing consumption to 11-12 million tonnes.

However, the outlook for supply is also positive. Global supply has been exceeding demand for two-three years now and is expected to do so in 2014 as well. Part of the reason is the huge stockpiles that Thailand built from government-funded price support programmes over this period. With sufficient stocks and production to meet demand, international prices are expected to continue to remain benign in the near to medium term.

Hitting the ground

The rubber futures contract traded on the National Multi-Commodity Exchange of India has been in a strong long-term downtrend. The contract had peaked at ₹24,790 per 100 kg on April 5, 2011 and has been falling continuously since then. It is currently trading at ₹12,525.

The contract had decisively declined below the 61.8 per cent Fibonacci retracement support level poised at ₹13,140 in the second week of August this year. This has added more downside pressure for the contract. It also suggests that the long-term downtrend remains intact and the contract could extend its fall further.

The 21-day moving average near ₹13,000 level is the immediate resistance. Support for the contract is at ₹12,000. A reversal from this support can trigger an intermediate rally to ₹13,000. However, the 21-day moving average resistance could restrict this rally and keep the overall downtrend intact. The probability is high to see fresh selling interest coming into the market if a bounce to ₹13,000 is seen. Having said this, a break below ₹12,000 can drag the contract lower to ₹11,000. Traders with a medium-term perspective can go short in this contract at current levels. Stop-loss can be kept at ₹13,500 for the target of ₹11,200. Intermediate rallies to ₹13,000 can be used to accumulate more short positions.

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