Several factors have influenced the price of rubber in the past quarter of a century. Growth in population and the development of world economy have enhanced the demand for goods and services, including rubber products. But the supply of rubber has not kept pace with the rise in demand.
The collapse of the last surviving commodity price stability agreement — the International Natural Rubber Agreement (INRA) —, the establishment of World Trade Organisation (WTO), the Asian financial crisis and the formation of International Tripartite Rubber Organisation (ITRO) by top three NR producing countries Thailand, Indonesia and Malaysia were some of the specific developments that had a great bearing on NR price trends during the past 25 years.
There are also other factors like impact of climate change on NR output, role of hedge funds, futures market activities, exchange rate variations in currencies, rise in oil prices and stock position that have influenced the NR market. These have brought about fluctuations in NR prices, which have ultimately affected the growth prospects of the rubber producing sector and the rubber manufacturing sector.
Price stability agreement
The violent fluctuations in the prices of natural rubber seriously affected the earnings of rubber growers during the 1970s. This
led to the formation of the International Natural Rubber Agreement (INRA) in 1979 under the aegis of the United Nations’ Conference on Trade and Development (UNCTAD). Thirty three consuming nations importing around 75% of the world supply of NR and seven producing nations exporting 95% of the world NR output were party to the Agreement.
The Agreement envisaged the maintenance of a buffer stock with a reference price and upper and lower ceilings to decide the time when purchases are to be made for the buffer and the time releases are to be made from the stock. Purchase for the buffer was to be made in periods of excess supply and the release from it was to be made in times of shortage, indicated by the lower trigger and upper trigger price levels.
There were many occasions to purchase rubber for the stock, but not even a single occasion arose for release from the stock as the price never reached the upper trigger level during the 15-year period when the Agreement remained in force.
Asian Financial Crisis
Long periods of distress sale made rubber growers despondent and a worried lot and many of them replaced rubber with oil palm and cocoa in their plots which gave better returns. The Asian financial crisis, which surfaced in 1997, aggravated the crisis. The whole of Asia, Europe and America slipped into recession. Industrial output fell. Demand for vehicles also fell, following which demand for tyres, auto rubber components and other rubber products declined. The consequent fall in rubber consumption and demand recession resulted in sharp fall in rubber prices.
The producing nations pleaded for an increase in reference price, but the rubber importing countries rejected the proposal. All the 33 consuming nations worked in concert in opposing the rubber growing faction and the voice of the seven rubber producing nations was muted in the din of the majority group. The consuming nations took an unyielding stance sticking fast to their argument that market forces should determine the price, despite the fact that formation of the Agreement itself was an effort to liberate the trade from the clutches of market forces. The unending conflicts between the two interests led to the liquidation of INRO in 1999.
The role of WTO
With the establishment of the World Trade Organisation in 1995, the stage was set for establishing a rule-based, transparent multilateral trading system among the nations. It has led to considerably bringing down tariff barriers and achieving market access to rubber and rubber products in almost all countries in the world.
Ever since the WTO’s guidelines on multilateral trade came to be honoured, the price of NR has ruled more or less in tandem with the world price. However, the aim of the WTO to let market forces decide the price did not find favour with producing countries like India. Past trends indicate that this is not an ideal solution to maintain the growth trajectory in agricultural commodities. The manufacturing industry needs support of the agriculture sector for raw material supply, but it has not appreciated the need of offering the producer a remunerative price. This was also true in the international scenario, when the International Natural Rubber Agreement (INRA) remained in force from 1980 to 1999. The consuming interests tried to keep the NR market in check through the interplay of demand and supply, without any regard to the rise in cost of production for rubber over the years, and the price remained lower to the fair level fixed in 1980, all through the next 19 years! Left to the market forces, it would be hard to obtain remunerative price.
Emergence of cartelisation
After the liquidation of INRA, the three major world NR producers Thailand, Indonesia and Malaysia, which accounted for about 66% of the world NR output, formed the International Tripartite Rubber Organisation(ITRO) in 2003, with the intention of making joint efforts to prop up rubber price. The trio applied supply control measures to shore up the price, which were highly effective. The 4% output cut reduced crop generation by 155,000 tonnes in 2002 and 200,000 tonnes in 2003. An unprecedented price boom ensued from 2004, which took annual average of NR price from Rs.55.70 a kg in India to Rs.159.52 a kg in 2010.
Similar rises were registered in the markets of other rubber producing countries. In April 2011 the world price crossed over $6 a kg, though subsequently it came down below $5 a kg. This kind of cartelisation has emerged out of the failure of market forces to ensure remunerative price for the producers. Once the NR price stabilised above the remunerative level, ITRO advised the participating countries to suspend the supply management exercises of output cut and the export trimming.
The resolve of the three nations has succeeded in correcting the lacuna that led to the INRA fiasco. The rubber producing countries around the world also reap the benefit of the trio’s bold initiative. Success of ITRO has inspired Vietnam, another country that exports a major portion of the NR output, to come under the ITRO fold.
The use of high yielding clones developed by research institutions in major rubber producing countries in fresh plantings and replantings during the past 25 years has helped substantial increase in productivity (see Table 3). Rise in productivity has helped enhancement in production of rubber substantially in recent years. The increase in production should normally result in moderation in price of rubber, but it has not happened on account of the high
demand for NR arising out of high growth in rubber manufacturing industries in China, India and other Asian countries.
The quantum of rubber consumed by China, India and Indonesia, which accounts for 67 % of the world population, has gone up manifold over the past quarter of a century. In 1985, these three nations together consumed 0.72 million tonnes of natural rubber. The quantum rose to 5.0 million tonnes in 2010, up 694.4%.
Fallout of climate change
Of late, climate change has been a major factor in bringing about tight supply in rubber. Heavy rains and short spells of drought over the main rubber growing regions have affected production of NR. Thailand’s NR output fell from 3.14 million tonnes in 2006 to 3.06 million tonnes in 2007 and to 3.09 million tonnes in 2008. In Indonesia, the NR output dropped from 2.75 million tonnes in 2008 to 2.44 million tonnes in 2009. In Malaysia the fall was more pronounced, from 1.2 million tonnes in 2007 to 1.07 million in 2008, further to 0.86 million tonnes in 2009 and 0.94 million tonnes in 2010. In India, the output fell from 0.88 million tonnes in 2008 to 0.82 million tonnes in 2009 and to 0.85 million tonnes in 2010. World NR production had dropped from 9.88 million tonnes in 2008 to 9.6 million tonnes in 2009. The resultant tight supply, along with the supply control measures, has caused price spiral in NR.
Influence of hedge funds
The role of hedge funds in hiking or hitting down the market is well known. These funds are capable of controlling the market to a large extent. Fund managers with deep pockets have profit as the prime motive from commodity transactions. They purchase NR in large quantum and keep in stock, creating an artificial scarcity in the market, and sell it later when the price would rise to their target.
Sale in huge quantum would cause downfall in the market. After the market has fallen flat, they would restart procurement operations, only to repeat the profit taking exercises. As prospects of the commodity for giving continued high price wanes, the fund will go in search of greener pastures.
NR stock and price
Carryover stock of rubber in the producing and the consuming countries also influences the market of rubber. When the stock is low either in the producing or the consuming countries, the price of rubber tends to perk up. Generally stock of rubber for three months’ factory consumption should be available in the country for a fair flow of the material from the supply source to the distant consuming centres. A lower stock level may lead to shortage.
The stock cover assures reasonable lead time for fair flow of material from the producing centre to the distant consuming centres through transporting channels. Conversely, when the stock level goes beyond 3 months’ consumption requirements, the stage would be set for a fall in the price. NR market remained subdued after 1995 as the global stocks rose to a historical high.
The global stock of NR had declined in the years 1993 to 1995 on account of enhanced economic activities and industrial production. This led to rise in rubber prices. Then as fallout of the Asian financial crisis, rubber consumption declined the world over from 1997 to 1999, leading to serious price fall. Even though the economic activities started to pick up from the year 2000, it could not benefit the rubber price as the high carryover stock was good enough to absorb the increment in demand.
Exchange rate variation between currencies of rubber exporting countries and of the consuming nations also influences price changes. While the US dollar, considered as the universal currency, rose in intrinsic value against the currencies in the rubber exporting nations, revenue of exporters declined in dollar terms, but zoomed in local currencies. But purchasing power of the depreciated local currency fell with a negative bias on earnings. Net result was fall in the price of rubber.
During the Asian financial crisis, currencies of Thailand and Malaysia fell by around 50% against the US dollar, and the Indonesian currency depreciated much more. Consequently, more local money was needed for importing goods from abroad.
Oil price is another factor that has impacted NR prices. When the oil price rises, it will get reflected in its by products that are feed stocks for synthetic rubber. Price rise in synthetic rubber has also brought about price rise in natural rubber. It is also noticed that when NR price moves up over the SR price, consumers go in for substituting NR with SR in a bid to keep the NR price in check.
It is obvious that price does not necessarily reflect the demand and supply of rubber. Speculative funds distorting the situation of supply and demand have largely affected the stability in NR price. The funds’ activities have thwarted market fundamentals in recent times.
The rubber producing and consuming nations have to come together again to devise a trade system rectifying the defects of INRA, in order to keep the world rubber market at a fair level, fair to both the producers and the consumers. A foolproof system evolved can turn out to be a lasting solution to the recurring violent market fluctuations.