Rubber producers’ attempt to boost prices needs discipline

Wednesday, 6 May 2015 00:28 - - {{hitsCtrl.values.hits}}

LAUNCESTON, Australia (Reuters): Is it different this time? Once again Asian rubber producers are trying to force prices higher, this time by restricting supply and attempting to break the link between physical and futures prices. Certainly, Asian rubber has moved higher since at least 10 major producing companies said earlier this month that they plan to raise prices and scrap a system of pegging them to the benchmark set by the SICOM exchange in Singapore. The main SICOM contract has jumped 7% since a six-year low of $1.35 a kilogram hit in January, a level that was revisited on 9 April, to close on Tuesday at $1.445. This is still 5.8% below the price at the start of the year and about a quarter of the record high reached in February 2011. Other regional benchmarks have also gained, with the Tokyo Commodity Exchange contract reaching a five-week closing high on Tuesday of 216.7 yen ($1.82) per kg, while Shanghai futures ended at 14,370 yuan ($2,318) per ton, a 16% gain since 9 April. These are impressive gains, but whether they can be sustained depends on the rubber producers being able to do something they haven’t done in the past, namely keep supply discipline for an extended period of time. Sri Trang Agro-Industry and Halcyon Agri Corp, which account for nearly a fifth of global natural rubber output, have joined with at least eight other growers in a bid to boost prices. They plan to raise rubber prices in the second half of the year, and some may stop supplying into the SICOM system in favor of directly negotiating with buyers, mainly tire makers. “Prices of SICOM no longer reflect the real cost of rubber production,” a spokesman for Thailand-based Sri Trang told Reuters in an email, adding that the company would also stop delivery to the bourse. Sri Tang is the world’s largest producer with an annual capacity of 1.2 million tons, an amount about the same as the output of Malaysia, the third-biggest producing nation. Halcyon will also stop supplying cargoes to SICOM, as will other producers. While this may be bad news for liquidity on the Singapore Exchange-owned SICOM, it doesn’t necessarily follow that the producers will be able to get the higher prices they seek. Major tire makers have flexibility to source rubber from other suppliers and may simply decline to pay the higher prices the producers want. It then becomes a game of chicken, with the winner likely to be the one who can last the longest. Given the global oversupply of rubber and healthy inventory levels, it seems the tire makers may be holding the better hand, at least for the moment. Inventories lower, demand mixed Crude rubber stocks at Japanese ports stood at 11,182 tons as of 10 April, down 3.8% since a reading on 31 March. The stocks have been declining since reaching above 22,000 tons in May last year, but remain at comfortable levels. Inventories monitored by the Shanghai Futures Exchange have also been declining, standing at 134,309 tons as of April 24, down from 207,658 tons in early February. However, they are still well above the low of 10,291 tons reached in May 2011. Demand in top buyer China has also been weak so far this year, with first quarter imports of natural rubber dropping 23.6 percent to 614,973 tons from the same period last year. This is despite vehicle sales still rising, albeit at a slower pace, with total sales rising 3.9% in the first quarter from a year earlier. While China has been slowing its rubber imports, the news isn’t so bad from the rest of the world, with demand gains in the United States and the European Union. However, the Association of Natural Rubber Producing Countries expects total natural rubber supply to rise 5% in 2015, after posting the first drop in half a decade in 2014. The association’s reasoning is that higher prices will tempt more production, which seems somewhat at odds with the rubber companies’ plans to cut output in order to boost prices in the first place. Previous attempts by governments in the top producers Thailand, Indonesia and Malaysia have met only limited success, mainly because state buying of supplies merely encouraged continued over-production. The rubber companies may enjoy more success, but their pockets will have to be deep enough to survive a period of lower sales volumes, and their shareholders will have to be brave enough to risk giving market share to competitors.

Rubber prices rise, buyers spurred to action on producers’ plan to boost market

Reuters: Prices for rubber cargoes in Asia rose this week after key producers announced plans to boost prices by curbing output and lifting premiums sharply over the market benchmark, traders said last week. At least 10 key rubber producers in Asia, where most of the world’s rubber is grown, last week said they would hike prices sharply from the second half of 2015, ditching a system of pegging them near the benchmark set by the Singapore SICOM exchange. The most active rubber contract on the Shanghai futures exchange for September delivery climbed to as much as 14,580 yuan per tonne this week, the highest since August last year, as investors increased long positions in anticipation of the plan. The contract posted its biggest monthly gain in April since December 2010, with a 14% rise. Benchmark TOCOM rubber futures meanwhile edged higher to 218.6 yen on Thursday on top producers’ efforts to boost prices, but profit-taking after a surge to a seven-week high earlier this week capped gains. “There has been volatile movement this week. Prices are definitely firmer,” said Singapore-based trader. “Overall, buying activity has picked up but magnitude-wise, it’s hard to gauge.” “The change of sentiment has caused some people to either take speculative positions or to cover their shorts. But whether there’s really long-term positions because of need, or just speculations, it’s hard to say,” the trader added. July shipments for the Indonesian SIR20 grade was traded as high as $ 1.49 per kg compared with $ 1.43-1/2 a week ago, with buying interest coming in Thai-based tiremakers, dealers said. Rubber producers in Indonesia, the world’s second-biggest grower after Thailand, are pinning hopes for prices to reach $ 1.50/kg. They are also reluctant to sell with some areas experiencing raw material shortages due to the wintering season. “If they do not have the raw material in hand, they prefer not to sell forward,” said a trader in Jakarta. Thailand’s STR20 exchanged hands between $ 1.46 and 1.47 a kg for the July delivery, firmer than last week as Chinese buyers and major tiremakers snapped up cargoes, said a trader from the southern Thai city of Hat Yai. The Thai tire-grade RSS3 was sold between a range of $ 1.76 and 1.77 per kg. Tiremakers also bought the Malaysian SMR20 grade for $ 1.50 for the June and July delivery, traders said. The main SICOM contract touched a high of 150 US cents a kg, the highest since January.

India to raise import tax on natural rubber by 5% from 1 June

Reuters: India will raise import tax on natural rubber by 5% to 25% from 1 June, Finance Minister Arun Jaitley told lawmakers last week. The move is to ensure domestic supplies in the world’s second-biggest natural rubber consumers. India, which buys most of its natural rubber from Thailand, Malaysia, Indonesia and Vietnam, is struggling to fulfil rising demand from tyre makers. Production of natural rubber fell 15.4% in 2014/15 from a year ago.