By Chen Weifang
In 2017, natural rubber prices rose and then dropped, which showed obvious characteristics of the shock to the bottom. According to the data of the first three months of 2018, the price of natural rubber has a slight shock at the bottom. Prices are unlikely to rise substantially in the near future, and it will take a long time to consolidate the bottom.
Bearish
1. Growth of supply
Natural rubber is an agricultural product, and the basic factor determining a country’s output is the area under yielding rubber trees. The peak of rubber’s last bull market was 2010~2011, and the peak of rubber tree planting was 2011~2012. In 2018 and 2019, many of the world’s rubber trees are just starting to yield, and output growth will slow down greatly in 2020, which should be a turning point for the world’s rubber supply. Besides area, the impact of yield per hectare and income per hectare on production should not be neglected. At present, rubber prices are low, so the enthusiasm of rubber farmers is not high, which is not conducive to an increase of yield per hectare. Last winter, Thailand suffered a cold wave, and output there in the first quarter was not as good as expected. But rubber output in Malaysia, Vietnam and Indonesia has increased. As to Chinese production area, after mid-March of this year, Yunnan began to tap rubber trees and China’s rubber output kept growing. According to statistics of the Association of Natural Rubber Producing Countries (ANRPC), ANRPC members are expected to increase production this year by 4.5% to 13.8 million tons, slightly below the 4.7% increase of the previous year. The growth of the rubber supply is outstripping demand growth, slowing the price rise.
2. High inventory
At present, the biggest rubber inventory in China (Qingdao bonded area) is still high. At the beginning of March, inventory there was 254 kt, 88 kt over the same period last year. The inventory was more than 430 kt, and Q1 registered warehouse receipts amounted to nearly 400 kt, a YoY increase of 121 kt. At the same time, about 150 kt of mixed rubber was outside the bonded area, and the inventory of old rubber in the State Reserve Bureau was 540 kt. High inventory is not accidental. High price differences and high dependence on the import market structure lead to growing inventory. At present, the price gap is shrinking, and import is decreasing month-by-month. The inflection point of natural rubber to stock has been reached. The deactivation of natural rubber will add to the rubber supply, which is not conducive to the rising price of natural rubber.
Bullish
1. Growth of demand
Demand for natural rubber is closely related to the development of the macroeconomy. Since entering the “new normal”, China’s economy has shifted from high speed growth to medium and high speed growth. Between 2016 and 2017, the explosive growth of the auto market was driven mainly by policy stimulation, such as management for overrunning and overloading, tax incentives for purchasing and so on. Now, the effect of such policies is waning. At the same time, with the downturn of infrastructure construction and the real estate industry, demand for tires is expected to change little.
Tires account for 35% of the value of all Chinese exports; although the tire companies are actively exploring new markets, the US is still the largest export destination. In January of 2018, China exported 422 126 000 tires, an increase of 2.6% over January of last year and a decline of 8% from December. Among them, truck tires and passenger tires sent to America increased by 17.5% and 6.8% respectively. In the late period, external demand continued to improve, and tire export growth was steady. The export market is expected to continue to grow. According to statistics of ANRPC, global demand for natural rubber will increase by 2.8% in 2018. Growth of natural rubber demand will promote prices.
2. Prices approaching cost
Since the beginning of this year, rubber prices have been slow in rising but quick in falling. Therefore, it is very important to pinpoint the rock bottom price of rubber. The cost of rubber planting in Yunnan is about RMB4 050 / t, while the cost of synthetic rubber is RMB6 000~7 200 / t. Other costs of processing and transportation are RMB1 500 / t, so the total cost is RMB11 550~12 750 / t. With the dealer premium, the market price of the natural latex emulsion in Yunnan should not be less than RMB12 500~ 13 000 / t. In other countries and regions, the cost of natural rubber is at this level. Spot prices lower than the cost will push the rubber farmers to give up tapping and promote stability of the rubber disk. Southeast Asia is the main area producing natural rubber, and the rubber output of the member countries of ANRPC supply nearly 80% of the world's rubber. In order to protect the healthy development of the natural rubber sector and the interests of domestic rubber farmers, ANRPC will formulate policies to strengthen the supply side of the rubber market and maintain stable prices. With prices falling constantly these days, intervention on natural rubber prices by ANRPC member countries would be excessive. The cost of producing natural rubber and government regulation together severely limit downward movement of the spot price.
Natural rubber prices have a distinct cyclical nature, and prices are mainly determined by supply and demand. Natural rubber plantations are slow to grow, making the elasticity of supply more constrained than that of demand. In 2018 and 2019, the world's natural rubber was still at the end of a bear market, and the prices of natural rubber were very low. So the natural rubber price seems to be probing its lower limit. Now the high inventory of natural rubber has increased the tension between supply and demand, increasing the downward pressure on prices. Prices are near cost. At the same time, natural rubber is essential to the livelihood of ANRPC countries. With an eye toward the healthy development of the industry and the interests of rubber farmers, China’s government will not ignore the plight of rubber sales.
To sum up, the natural rubber market has been bearish too long, leaving prices weak. In 2018, they will continue to fluctuate at the bottom between RMB11 000 and RMB14 000 / t.
