Recent Developments in Natural Rubber Prices

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nt Developments in Natural Rubber Prices

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Title: CONSULTATION ON AGRICULTURAL COMMODITY PRICE PROBLEMS...

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RECENT DEVELOPMENTS IN NATURAL RUBBER PRICES

Presented by A.F.S. BudimanSecretary-General

International Rubber Study Group

The current world consumption of rubber, totalling around 18 million tonnes per year, consists of48% 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 iscontinuously increasing at a rate of 3-4% per year, in line with improvements in living standardsaround the world. Synthetic rubber is purely an industrial raw material. The producing andconsuming industries are in general closely related and dominated by large and globalenterprises. Being a petroleum derived product and manufactured by polymerisation process inchemical plants, the management of supply against demand is relatively straightforward. To acertain extent, the prices of its basic ingredients namely the monomers are more or lessinfluenced by the price of petroleum.

Natural rubber, on the other hand, is also consumed as an industrial raw material. In rubberarticles, 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 articlesare basically choosing the kinds of rubbers to be used on the grounds of technological merit andeconomic availability. 70% of NR and 60% of SR have been manufactured into automotivetyres.

However, natural rubber is unique in the sense that it is consumed as an industrial raw materialbut produced as an agricultural commodity, and now over 80% being sourced from independentsmallholders. Consequently, it becomes a social commodity where more than 30 million smallfarmers are at stake worldwide.

The global economic slow down has obviously affected natural rubber demand greatly, resultingin lowest ever market prices in the past 30 years. Reduced demand was exacerbated by increasedsupply from South East Asia, most remarkably from Vietnam which in the last six years haddoubled 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 upan International Tripartite Rubber Organization (ITRO) to manage sales and withhold stocks. Thethree countries agreed to cut exports by 10% as of 1 January 2002 in addition to cutting output by4% in 2002 and 2003 through replanting, diversification with other crops and reduced newplanting.
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This joint action by the major producers, has suggested that natural rubber producers considercurrent prolonged low prices as no more sustainable. Previously, INRO which was acollaborative effort involving producers and consumers, was considered not effective by themajority 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 pricestracked, Thai RSS 3 fell by the biggest margin, while, surprisingly, Indonesian TSR 20, asproxied by New York TSR 20, fell by the smallest margin (Figure 1). However, the year closedwith a recovery at the onset of the rainy season, the advent of wintering in Southeast Asia andthe setting up of the International Tripartite Rubber Organisation (ITRO) attempting to curtailsupply to the market. The overall downward trend was the result of an imbalance in the rubberindustry, which towards the end of the year was made worse by the actions of the interventionscheme of Thailand. Weather, seasonal factors and currency movements, however, ensured abrief interruption to the downward trend. The short-term price rally was most visible betweenlate-March and mid-July. One of the features of 2001 has been the resilience of the Indonesianrubber 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 rubberproducing area of Indonesia, have been suffering from heavy rain and resulting floods. Winteringis fast approaching the region, which would interrupt rubber supply reaching the market. Thecombined effect would be a possible temporary shortage in the market. However, judging fromthe 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 thelevel may be sustained with wintering approaching. Furthermore, some of the major automobilemanufacturers have planned to boost their production in the first quarter of 2002 as a result oflow inventories, which would also aid price level stability.

Factors influencing NR prices


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The fundamental factors influencing NR prices are demand and supply, while all other factorshave 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 theprice of NR relative to SR influences a falling share of SR in total rubber consumption, and aweak Indonesian Rupiah relative to currencies in other producing countries encourages anincrease in exports and output from Indonesia and hence a rise in world NR supply. Changes tothe stock situation provide an indication of the relative tightness of the rubber market. Tightnessin the rubber market provides upward pressure on prices and vice versa. Important factors in thelong 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 variousshort-term factors such as weather, currency movements, futures markets activities, marketinterventions and irregular demand.The forecasts of output discussed above, particularly for NRare produced, assuming that no extraordinary events occur in producing countries. Furthermore,the forecasts are based on production and export controls in producing countries such asreplanting, chopping trees, switching to other crops or tapping suspension, have not materialisedto a large degree.

How low were rubber prices in 2001? First, let's examine RSS1 prices in New York and Londonsince 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 (twoseparate 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 lowestlevels since 1975. However, New York prices, for the same period are lower at 746.5 US$/tonnein 2001 compared to 808.2 US$/tonne in 1999, but 2001 prices are still higher than the averageprice of 658.9 US$/t

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Recent Developments in Natural Rubber Prices