By A. Saj Mathews:
As the long wait for a bounce back of the NR market continues, concerns about the future of this vital industrial raw material are growing across all major rubber producing countries. While low prices are dissuading growers from going ahead with NR cultivation, NR is facing growing threats from other natural alternatives, researches on reducing NR content in key products like tyre and gloves, and substitution by synthetic rubber varieties. Adding to the crisis is the overplay of non-fundamental forces like currency fluctuations, climatic vagaries, oil prices, etc. impacting NR prices.
Natural Rubber (NR), the most sought-after industrial raw material of mankind, appears to be at crossroads of late. A gift of nature in the form of latex obtained from rubber trees (Hevea brasiliensis) and nurtured by man over centuries, NR continues to be the coveted raw material for wide range of industrial products, especially the automobile tyres. According to the latest report by international rubber research experts, amongst the world’s 17.1 million tonnes of elastomers, NR accounts for 7.89 million tonnes.
The industrialization process in China, which started during 1999-2000, led to a steady increase in global rubber off-take and helped natural rubber price to show a steady rising trend for the most part of the 2000’s. But, prices started to fall significantly since the beginning of the current decade as demand was not picking up due to the lingering global economic slowdown. But in 2014 and 2015, rubber prices nosedived despite a favourable demand-supply situation.
NR prices have witnessed several ups and downs throughout the history, mainly on account of market fundamentals of demand and supply. But of late, especially in the latter part of the current decade, there has been a growing over-influence of non-fundamentals like currency fluctuations, oil prices, weather vagaries, world GDP trends, speculations etc in deciding the prices rather than the actual demand and supply factors.
The latest trends show that prices are still falling despite a deficit in supply against a strong demand. Natural rubber prices across key physical markets suffered further losses from the last week of May 2017 despite a deficit in world supply, according to the May 2017 Natural Rubber Trends & Statistics (NRTS) released by the Association of Natural Rubber Producing Countries (ANRPC), representing the world’s 11 major rubber producing countries.
Based on ANRPC’s preliminary estimates, world supply during January to May 2017 was nearly 600,000 tonnes in deficit and the shortfall is anticipated to widen to around 700,000 tonnes by the end of June 2017. World supply during 2017 is anticipated at 12.756 million tonnes, slightly lower than 12.771 million tonnes anticipated a month ago. The downward trend NR market even in the face of a deficit in supply is certain to dampen the enthusiasm of farmers to increase output any further and may even lead to further fall in supply.
In Kuala Lumpur market, the price of benchmark grade SMR-20 fell from US$ 157.90 per 100 kg on May 23 to US$ 138.80 per 100 kg on June 6, 2017. Similar trends are observed in the prices of STR-20 and RSS-3 in Bangkok market too. Strikingly, the price-fall has coincided with a period of deficit supply, and the bearish trends from the end of May can be attributed to non-fundamental factors.
Market analysts also confirm the fact that prices are being influenced by factors other than the basic demand and supply. Dr. Nguyen Ngoc Bich, Secretary-General, ANRPC, says that the physical prices of NR are increasingly dominated by sentiments in Shanghai and TOCOM futures which are vulnerable to fluctuations in currencies, crude oil prices and geopolitical developments. “Analysis reveals that the prevailing bearish trends in NR prices are largely due to unexpected fall in crude oil prices and sharp appreciation in Chinese yuan and Japanese yen. Speculative investors’ expectation of an upward revision in the US policy interest rates in June stands as another major constraint for recovery in Asian commodities including NR. These observations point to the increasing vulnerability of natural rubber prices to factors external to its demand and supply,” Dr Bich adds.
Says A. Ajith Kumar IAS, Chairman, Rubber Board, India,: “In the present context of a globalised market, the major factors influencing rubber prices are trends in world GDP growth, situation in major consuming countries, especially China and India, developments in tyre and vehicle sectors, crude oil price, weather conditions in major producing areas, currency fluctuations, speculative elements and other geopolitical situations.” Pointing out that all these factors may vary influencing NR market and price trends, he adds: “In this context, what is more relevant is to devise strategies to improve the net income of growers so as to enhance the economic viability of rubber cultivation.”
Till the last decade the expectation was that, while non-fundamental factors such as crude oil prices and the currencies of major NR-exporting countries might stay unfavourable, the demand-supply fundamental would strongly support the market from 2016 onwards. However, the latest trends are proving otherwise.
Observes Jom Jacob, renowned market analyst and presently Senior Economist at ANRPC: “It is a paradox that prices of natural rubber nosedived during 2014 and 2015 despite supply stood short of demand. The market behaved in sharp contrast to what was expected from a favourable demand-supply fundamental. Although the paradoxical situation is partly explained by the surplus generated in the previous years, it largely manifests the increasing vulnerability of NR market to factors other than demand and supply.”
Behaviour of futures market
Behaviour of the futures markets, especially the dominant Shanghai and TOCOM, needs to be examined to understand the influence of non-fundamentals on NR prices. According to ANRPC, one major factor which has pushed down Shanghai RSS-3 futures from mid-April 2017 is the sharp fall in crude oil prices. Although major oil producing countries under an OPEC-led initiative reached an agreement to extend the production curtailment programme, crude oil prices sharply fell on reported higher US output and inventories. “Whenever crude oil prices fall, speculative investors in Shanghai futures bet on possible substitution from natural rubber to synthetic rubber and this turns Shanghai RSS-3 futures bearish,” ANRPC report says.
Another major factor which influenced Shanghai RSS-3 futures is the sharp appreciation in Chinese yuan from 24 May. The strong yuan is believed to have discouraged speculators from investing in yuan-denominated assets, causing selling pressure in RSS-3 futures. Investor sentiments at Shanghai futures have also been affected by a few economic and geopolitical developments. These include, America’s growing protectionism, withdrawal of the US from the Paris Climate Change Agreement, uncertainty over outcome of the UK elections, the decision by several Gulf States to sever ties with Qatar over its alleged support of terrorism, provocation by North Korea by firing another missile and growing geo-political tension over the Southern China Sea.
Due to the profound influence of TOCOM RSS-3 futures on physical process of NR, factors influencing the former are important to understand the trends in the latter. TOCOM RSS-3 futures are strongly influenced by the strength of the Japanese yen against the US dollar because TOCOM futures are traded in denominations of yen. A stronger yen makes yen-denominated portfolios expensive to overseas investors and hence discourage them from investing in TOCOM futures. Therefore, TOCOM rubber futures are expected to turn bearish during the appreciating phase of yen. The Japanese yen registered a sharp appreciation beginning from May 11 and TOCOM RSS-3 futures fell almost coinciding with the appreciating phase of yen.
Market analysts say that the prevailing trends in crude oil prices do not support a trend-reversal of NR prices in the short-term. The forecasts suggest that NR prices are unlikely to gain strength from the crude oil market. Meanwhile, oil industry analysts share the view that the US shale industry cannot be economically viable at the prevailing oil prices. In other words, oil supply is likely to undergo automatic correction which can help recovery in oil prices.
Potential upward revisions in the US policy interest rates do not provide a favourable climate for recovery in the Asian commodity prices. Higher US interest rates mean higher yields for Treasuries and a stronger US dollar. The resultant higher yields on US assets attract portfolio capital from commodities to the US. Therefore, the Asian commodities are unlikely to be a bright spot for speculative investors as far as the US Federal Reserve continues with its already announced plan to raise the policy interest rates. A weak US dollar is a precondition for marked recovery in the Asian commodity prices and natural rubber is no exception.
All these point to the crucial question of a sustainable future for NR. In the wake of the continued slippages of NR price after it touched enviable peaks in 2011, rubber growers across all major producing countries are more than worried over NR’s long-term prospects in terms of net returns. Finding continued harvesting and maintenance of NR holdings uneconomic, growers by and large have lost interest in rubber cultivation, especially in new planting and replanting. Reports of many growers across countries cutting down rubber trees to use the land for more remunerative options are also pouring in. While potential damage to the global supply looms large, the consuming industry is increasingly concerned over long-term availability of NR to cater to the increasing future demands.
World demand and supply
In the backdrop of these unfavourable factors, world supply of natural rubber is expected to rise by 5.5 per cent to 12.756 million tonnes during 2017, marginally lower than the figure anticipated a month ago. The supply is likely to be revised-down further in view of the downswing in NR prices from the last week of May 2017, says ANRPC.
In response to the further fall in prices, a section of farmers is inclined to reduce frequency of harvesting and delay reopening tapping till expiry of the wintering off-season. Moreover, the original projection assumed is that 630,000 ha of trees planted during 2010 would be newly opened for tapping by June 2017 coinciding with the beginning of new crop-year. “Due to the prevailing low prices, a portion of this area may not be opened for tapping. During a low phase of prices, farmers are generally reluctant to open young trees for tapping,” says ANRPC.
Though rubber bodies like Rubber Board, India, have been continuing the efforts to promote replanting and new planting, one of the factors key to new planting is the price. Says Ajith Kumar: “During the four years from 2008-09 to 2011-12 when rubber prices were relatively high and increasing, average annual new planting was around 26,000 ha. But annual average new planting declined to around 19,000 ha in the subsequent four-year period from 2012-13 to 2015-16, marked by low and declining prices.” The new planting and replanting trends will have definite impact on the future production potential of NR, he adds.
As per ANRPC figures, world demand for natural rubber is anticipated to increase by 1.7 per cent to 12.900 million tonnes during 2017, higher than 12.817 million tonnes anticipated a month ago. Due to revision in China’s figure
for 2016, the world demand for 2016 has been revised up to 12.679 million tonnes at a 4.2 per cent growth.
Demand is anticipated to grow faster at 1.9 per cent rate in ANRPC Member-Countries which account for 64% of the world demand. China which accounts for 39% of the world demand, is anticipated to consume 4.950 million tonnes of NR during 2017, up 0.1 per cent from 2016. Consumption in China had grown 5.6 per cent during 2016. Consumption in India, the second largest consuming country and accounting for 8 per cent of the world demand, is anticipated to rise 3.5 per cent to 1.070 million tonnes.
Consumption of NR in China fell by 3.1 per cent, year-over-year, during January to May 2017. During 2017, the consumption in China is expected to grow only by 0.1 per cent after the 5.6 per cent growth attained in 2016. Based on a preliminary estimate, consumption in India increased by 2.8 per cent, year-over-year, during April to May 2017 and the growth anticipated for 2017 is 3.5 per cent, slightly lower than the 4 per cent attained in 2016.
In the light of emerging economic developments across major NR-consuming countries, world demand for NR is anticipated to increase by 1.7 per cent to 12.900 million tonnes during 2017, slower than 4.2 per cent attained during 2016. The demand is anticipated to grow by 1.9 per cent in ANRPC Member-Countries and 1.5 per cent in non-ANRPC Countries during 2017.
Preliminary estimates show that world supply of NR during January to May 2017 was deficit by 598,000 tonnes, says ANRPC. Anticipated figures for June 2017 onwards reveal widening of the deficit to 699,000 tonnes by the end of June before narrowing down to 144,000 tonnes by the end of the year. Notably, the anticipated mismatch between supply and demand is wider compared with the forecasts released by the Association a month ago.
Industrial rubber market scene
The trends in the global industrial rubber market are crucial to the ups an downs in the rubber (both NR & SR) market. In the industrial rubber sector, growing automotive industry, rising construction output and manufacturing activities are some of the key factors driving the growth of the industrial rubber market.
Tyre manufacturing industry was the second largest application segment for the Isoprene rubber market over the past five years, and it is expected to witness fastest growth in the coming years on account of rising demand for automobiles across the world, especially in growing economies including India and China. Demand for Isoprene rubber is expected to grow over the next six years owing to its increasing application scope in the tyre manufacturing industry. The medical sector was the largest market for Isoprene rubber over the past few years on account of its increasing application scope in gloves and balloons.
With rising automotive sales, growing population, increasing disposable income and rising urbanization, the need for industrial rubber products are increasing. The rapidly growing automotive sector in developing economies and increased demand for high-performance tyres, sealing products, and tyre adhesives are expected to contribute to the growth of the global industrial rubber market. Asia Pacific and Japan, which are projected to witness a substantial growth, will contribute to the global industrial rubber market value exhibiting a robust CAGR during 2015-2025.
Volatility of the oil prices, environmental concerns and associated government regulations, limited number of suppliers and increasing threat from the substitutes are probable factors negatively impacting the growth of the industrial rubber market. As on date, Asia Pacific is the largest producer and consumer of industrial rubber, with its tyre sector exhibiting promising growth rate.
Rapid industrialization coupled with growing automobile demand in emerging economies including India, China and Malaysia, is anticipated to boost the Isoprene rubber market over the forecast period. China is the leader in the Asia Pacific region owing to its growing population, increasing demand for rubber in the automobiles sector and others.
Threat from NR alternatives and SR
Threats to the survival of NR come not only from NR alternatives but also from the SR varieties. It is reported that Isoprene rubber is expected to replace natural rubber in various applications over the next six years owing to the similar molecular structure and similar properties. Asia Pacific has been the largest regional segment for Isoprene rubber on account of its increasing demand from the medical and tyre manufacturing industries. The share of SR in total world rubber consumption is on the rise and it stood at 54% in 2016.
Volatile prices of natural rubber are further expected to drive the Isoprene rubber market growth. The 1950’s and 1960’s were periods of intense competition between NR and SR. Technological changes, including the development of radial and truck tyres, and the increasing use of NR latex products caused the SR share to drop since the early 1980’s. Rubber prices have been on a steady downward trend, mainly because of the over-supply of NR. Synthetic rubber can’t completely replace natural rubber because of the latter’s unique molecular structure and high-performance properties that cannot easily be displayed by artificially produced polymers.
But the question is: Will King NR lose the Crown because of a host of hostile factors such as climate change, plant diseases, natural calamities etc. Hevea may continue for long as the sole commercial source of rubber for tyre makers till research institutions make much headway in their endeavour to develop alternative sources of natural rubber. Bridgestone and Pirelli have already produced and trial tested tyres whose NR content is 100% sourced from the desert shrub, guayule. Continental and Apollo Vredestein have produced tyres made of NR derived from Russian dandelion. Tyre makers such as Cooper Tire & Rubber Co and Sumitomo Rubber Industries (SRI) too are in an advanced stage of developing tyres made of guayule and dandelion rubber.