Recent 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. Budiman
Secretary-General
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 J anuary 2002 in addition to cutting output by
4% in 2002 and 2003 through replanting, diversification with other crops and reduced new
planting.
Recent Developments in Natural Rubber Prices
http://www.fao.org/docrep/006/y4344e/y4344e0d.htm[11/24/2010 3:15:15 PM]
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-J uly. 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 J anuary 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
Recent Developments in Natural Rubber Prices
http://www.fao.org/docrep/006/y4344e/y4344e0d.htm[11/24/2010 3:15:15 PM]
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$/t