Monday, November 21, 2011

Asia rubber producers bow to markets for now

SINGAPORE (Nov 21): The decision by the world's top three natural rubber producers, Thailand, Indonesia and Malaysia, to refrain from intervention to boost prices is probably sensible as such a move would probably have failed.

Of course, there was a bit of bravado to emerge from the weekend meeting in Bangkok of the International Tripartite Rubber Council, which groups the three nations that account for 70 percent of global natural rubber output.

Rubber prices will recover in coming months as production will be affected by heavy monsoon rains, the group said, saying the recent price slump is "abnormal and unreasonable."

Rubber prices on the Tokyo Commodity Exchange, the main Asian benchmark, plunged 53 percent from a peak of 535.7 yen a kilogram in February to a low of 248.6 yen on Nov. 11, prompting speculation the big three producers would step in to bolster prices.

But even if the producers had decided to take action, it's doubtful they would have had much success, despite their seemingly dominant position in the rubber market.

First off, there are doubts that they could effectively stick to any agreement to restrict output as they lack a tradition of working as a cartel and there is always the chance of cheating, which would serve to limit any price gains.

The three countries have agreed to restrict output before, most recently in December 2008 as physical rubber fell to a seven-year low amid the global recession.

But the plan to cut exports by a total of 915,000 tonnes, or roughly a tenth of global output, wasn't strictly enforced as the market recovered in 2009 as tyre demand increased in India and China.

Another factor to consider is natural rubber competes with synthetic output, with the global production split being 57 percent to 43 percent in favour of the manufactured product derived from crude oil in 2010, according to data from the International Rubber Study Group (IRSG).

While the two types of rubber aren't fully fungible as there are costs involved in changing equipment to use different types, the price of natural rubber has usually been fairly close to that of synthetic, and in turn also fairly well correlated with crude oil.

Data from the IRSG show that over 2008, natural rubber was only slightly more expensive than U.S. export synthetic rubber, with a ratio of 100.7.

In 2009, the manufactured product was more expensive with a ratio of 93, but this reversed last year when natural rubber prices almost doubled, taking the ratio to 134.9.

When natural rubber reached its record high in the first quarter this year, the ratio blew out to 188.3, meaning natural rubber was almost twice the price of the synthetic equivalent.

The ratio declined to 140 in the second quarter, according to the IRSG, but that's still some way from where it was in 2008 and 2009.

What this shows is that some of natural rubber's recent price fall was justified and also that the outlook is probably more dependent on the direction of crude oil.

Given the increasingly gloomy outlook for the world economy, it's likely that oil prices will struggle to rally and may remain in a narrow range around current levels, with Brent crude trading just below $108 a barrel on Monday.

Given that tyre manufacturing accounts for about 60 percent of global rubber consumption, a darkening economic picture may cut physical demand as consumers buy fewer new cars and stretch existing tyres to the limit before replacing them.

Given that much of the rest of rubber demand is in industries exposed to global growth such as CONSTRUCTION [], mining and transportation, the chance of rubber revisiting its peaks of earlier this year any time soon seem remote.

While unilateral action by individual producers to limit supply at the current low prices may result in some bounce, it will take a brighter picture for the global economy to perk up rubber. - Reuters

Clyde Russell is a Reuters market analyst. The views expressed are his own

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