Domestic natural rubber prices (RSS-4 variety) have seen a rebound since the multi-year low of ₹94 a kg (average monthly price) in February 2016. From this point, average monthly prices rose steadily to ₹159 a kg in February 2017, before cooling off a bit in the last two months to around ₹125-135 a kg. What drove up the prices?

Reasons for the move

After the peak of ₹200-240 a kg seen in 2011, average monthly prices of natural rubber stabilised at around ₹160-180 a kg over the next one to two years. But prices fell sharply after that. From about ₹186 a kg in July-August 2013, average monthly prices halved, touching rock bottom in February 2016, at ₹94 a kg.

But it was a different story in fiscal 2017, with prices beginning to move up steadily, influenced by the rise in prices internationally. Earlier, in 2015-16, a cooling off in demand from China, slow recovery in the US and Europe, and oversupply in the global markets sent international rubber prices spiralling down. But with economies such as the US gaining in strength, and temporary supply concerns following heavy rains and floods in Thailand and Malaysia, global prices began inching up in 2016-17.

Domestic demand for rubber too began looking up. According to Rubber Board data, the total quantity consumed in 2016-17 was 10,43,075 tonnes, up 4.9 per cent over the previous fiscal. In contrast, consumption had remained subdued in the earlier years. Natural rubber consumption in India grew by a mere 0.9 per cent to 9,81,520 tonnes during 2013-14 over 2012-13. Fiscal 2014-15 did show some promise, but that did not play out, with consumption slipping again in fiscal 2015-16 by 2.6 per cent over the previous year.

Considering that about 65 per cent of the consumption is by the auto industry for manufacture of tyres, this rise in rubber prices also corresponds to the trends in automobile sales seen in these periods. Overall vehicle sales grew by a muted 3.5 per cent in 2013-14, picked up tentatively in 2014-15 but moved on to the backfoot again in 2015-16. Against this, despite the temporary blip from demonetisation, 2016-17 saw a 6.8 per cent growth in vehicle sales.

Imports

Second, a fall in imports also supported domestic prices. According to data available from the Directorate General of Commercial Intelligence & Statistics, the country imported 4,42,130 tonnes of natural rubber during 2014-15, compared to 3,60,263 tonnes imported in the year before – a 23 per cent growth.

Similarly, imports during 2015-16 showed a 3-4 per cent jump over the previous year. This is because international prices, represented by the prices prevailing in Bangkok, stood lower than domestic prices then, making imports a cheaper alternative. Since mid-2013, the difference between average monthly prices per kg in the domestic and international markets stayed in the ₹7-30 range. But international prices moved to a premium over domestic prices towards the second half of 2016-17, making imports unattractive.

Besides, the government placed certain restrictions on import of natural rubber in early 2016. Thanks to these two factors, the total quantity that landed in the country during the 11 months ended February 2017 was 4,00,893 tonnes — a drop of 7 per cent from the year-ago period.

Outlook

The fall in rubber prices in the last two-three months mirrors the behaviour of many commodities that have cooled off in this period, following mixed economic signals from China. But domestic demand for natural rubber can be expected to hold up prices to an extent.

With the effect of demonetisation wearing off, various measures announced in the Budget to uplift the rural economy, good monsoons and benign borrowing costs are expected to sustain the pick-up in auto sales. This will help boost demand for rubber in the country.

According to the latest outlook put out by the International Rubber Study Group in December 2016, world natural rubber demand is forecast to increase by 2.9 per cent to 12.87 million tonnes in 2017. And the supply is seen as sufficient to meet the demand of industry, according to the Study Group.

Given this comfortable demand-supply equation, there may be no sharp spikes in natural rubber prices in the near to medium term.

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