International prices for natural rubber are continuing their upward march, with benchmark futures on the Tokyo market hitting a nearly three-year high. Behind the rally is a combination of multiple factors that include rising prices in China, the world's biggest consumer of natural rubber, a stronger dollar, higher oil prices and expectations for growing global demand for the commodity. In addition, analysts see the current spell of rainy weather in rubber farming regions as an emerging factor boosting prices. Higher prices for the material are certain to increase costs for manufacturers of tires and other rubber products.
In mid-December, the deferred futures contract for Ribbed Smoked Sheet No. 3 (RSS3) on the Tokyo Commodity Exchange, a global benchmark for sheet rubber, shot up to a three-year high. The near futures contract for Technically Specified Rubber No. 20 (TSR20) on the Singapore Commodity Exchange, a benchmark for rubber formed into blocks, is trading around the highest price levels in about 33 months.Many market participants cite price surges in China as the biggest reason. The most heavily traded contract for natural rubber futures on the Shanghai Futures Exchange began to rise at a moderate pace around May. The contract quickened its pace of advance in November and came close to 20,000 yuan ($2,884) a ton in mid-December. Prices have nearly doubled on the Shanghai market since the start of the year and have gained 80% to 90% on the Tokyo and Singapore markets.
A flow of speculative money into Chinese commodity markets, such as in Shanghai and Dalian, became noticeable this past summer. It was apparently because Beijing's tighter restraints on real estate investment made it difficult for local investors to find places to park their money, making them turn their eyes to commodities traded on exchanges, such as nonferrous metals and natural rubber. "As daily rubber trading turnover is dozens of times greater than in the Tokyo market, [the Chinese market] now has a growing influence on international prices," said an official at a commodity futures commission house.
The rubber rally is also partly attributed to a stronger dollar and an upturn in crude oil prices. The declines in the value of the yen and the yuan against the greenback since October made natural rubber prices, denominated in local currencies, look relatively undervalued on the Chinese and Tokyo markets, which helped draw active buying there. Expectations of higher prices for synthetic rubber, a competing product, also helped make it attractive for investors. The principal ingredients of synthetic rubber, such as butadiene, are made from increasingly expensive oil.
Market participants have hopes for a pickup in demand for natural rubber. One reason for this view is robust new car sales in China. Deliveries in the January-November period totaled 24.94 million vehicles, up 14.1% from a year earlier, according to the China Association of Automobile Manufacturers. Investors appear to have taken a cue from the strong auto sales, seeing them as signaling greater demand for tires. In reality, however, tires made mainly from natural rubber are intended for large vehicles, such as trucks and buses. "Sales of large vehicles are slower in recovery, compared with small cars," said Shinichi Kato, head of a rubber trading company that bears his name. "Speculative investors are buying [natural rubber] just in association with tires, without knowing that difference."
The Trump factor
Another factor prompting investors to buy natural rubber is that U.S. President-elect Donald Trump will likely expand public works investment. They believe that if the Trump administration raises government spending on infrastructure and similar projects, demand for not just rubber but industrial materials as a whole will grow. The current pickup in nonferrous metal prices is expected to encourage mining companies to expand operations, which will likely lead to greater demand for tires intended for mining vehicles, which are made using more natural rubber than synthetic rubber.
A current supply-side factor is also drawing interest. "The southern part of Thailand [which is a major rubber farming region] is suffering from heavy rainfall, which has even caused flooding," said an official at a rubber trading company. Rubber tree tappers often put off their work when it is raining, because rainfall dilutes the rubber sap collected in their cups. So experts think the abundant rainfall is likely to dent rubber supply.
Higher prices increase manufacturing costs for all types of rubber products, not only tires. Yet tire makers must also brace for the possibility of higher synthetic rubber prices and price hikes for carbon black, a material used as a reinforcing filler in rubber products. Bridgestone CEO Masaaki Tsuya did not make comments on the present market situation but said that "it is desirable for prices of materials to be stable."
It is anybody's guess whether natural rubber prices will stay high. According to Hideshi Matsunaga, an analyst at commodity broker Sunward Trading in Tokyo, prices in Shanghai have reached a level that makes market participants nervous. "They seem to be recalling what happened three years ago, when the market tumbled after having come close to the 20,000-yuan mark."
Some bearish factors are also notable. China's tax incentives for buyers of small cars, which boosted sales, are due to be terminated at the end of this year. Meanwhile, an arrangement by Thailand, Malaysia and Indonesia -- the three major producers of natural rubber -- to curb exports is also expected to end this year. Not least because the current rise in natural rubber prices has been led by speculative investors, "it will be no surprise if the market slips into a correction phase any time," said an expert at a rubber trader.
The market situation will likely remain unforeseeable for some time to come.
