Expanding supplies dim rubber outlook

Fall in prices has begun to discourage producers. However, the upside seems limited



Natural rubber prices have steadily drifted lower this year, continuing a trend that started three years ago. Prices have fallen by as much as 70 per cent from the peak seen in February 2011. The world rubber market is now in its fourth successive year of surplus.

Clearly, we are in a structural expansion phase in the rubber production cycle. In Asia and Africa, trees planted way back in 2006-08 period have matured now into full yielding stage. No wonder then that prices are drifting lower.

From an average of close to $5 a kg in 2011, rates have steadily declined to around $2/kg now. The trend was clear early this year ( BusinessLine April 27, 2014).

With production growth exceeding consumption, there has been the inevitable stock build-up . At the same time, producers continue to fiercely compete for retaining market share by pegging down prices.

Given the fragmented nature of the rubber producing industry, producers are also unable to bring about any price discipline.

Growing demand

Given that rubber is mostly purchased by industrial users, low prices have encouraged demand, particularly from tyre-makers. Relatively healthy global industrial environment has translated into higher consumption of rubber by the automotive/tyre industry.

The trend of higher consumption is expected to continue into 2015. Global demand is set to grow by about 4 per cent in 2014-15 mainly driven by an incremental consumption by China. Other Asian economies, notably India, will also consume more. Demand improvement is seen in European and North American markets as well.

The market is expected to remain in surplus next year also ; though the quantum of surplus is likely to be managed by slower tapping and limited supplies.

Many believe that the rebalancing process has started. So, in the next couple of quarters, the upside potential for price is limited although recent troughs have begun to discourage producers.

Even as Thailand and Indonesia continue to dominate production with a combined share of about 60 per cent, they are trying to limit rubber supply this year. At the same time, smaller producers such as India (900,000 tonnes) and China (850,000 tonnes) have increased their tapping intensity to take advantage of growing domestic demand and cheap labour.

India picture

With domestic production falling short of consumption demand, India’s rubber imports are on the rise.

According to an industry estimate, imports are up from 81,500 tonnes in 2008-09to over 210,000 tonnes by 2012-13. In value terms rubber inflows may breach the $1-billion mark thisfiscal.

In sum, one can expect consumer-friendly prices to prevail over the next two-three quarters with possibly a small upside risk because of lower tapping.

Unless urgent policy measures are initiated to raise production and productivity of rubber, India’s import dependence could worsen; and the ongoing friction between domestic producers and industrial consumers for tariff protection will intensify.

Read the rest of this article by Signing up for Portfolio.It's completely free!

What You'll Get





Related

This article is closed for comments.
Please Email the Editor