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NR supply uncertainty and price boom

14 May 2012 05:13 pm - 0     - {{hitsCtrl.values.hits}}


Expectations of a faster global economic growth have been partly dampened by worries of China’s economic slowdown and higher energy prices even as outlook for the U.S. and Japan has brightened.

China’s manufacturing activity, measured in terms of the rate of booking new orders at factories, fell to a four-month low in March, 2012.
 Rising wages and energy prices have reportedly affected the country’s manufacturing sector. The government raised gasoline and diesel prices by 6 to 7% in March, the second increase this year, compelled by rising crude oil prices. Given this background, the government has set a lower growth target of 7.5% for this year, a drop from the 8.0% rate attained in the previous year.

Notwithstanding these disturbing developments, the import of items for infrastructure, automotive industry and rail development are still growing and the inflation is cooling. The consumer-price index grew only at 3.2% from a year earlier in February, down sharply from 4.5% in January and well down from the peak inflation rate of 6.5% clocked in July last year. The government is expected to ease its policies later this year helping to build domestic consumption and reduce reliance on exports and investments.  A modest improvement in the U.S. economy has helped in partly making-up for the recent drop-off in China’s momentum. The U.S. job market continues to strengthen with the number of Americans applying for unemployment benefits now at a four-year low.

In Japan, the central bank’s efforts to keep the yen down have helped a rebound in its exports which form the mainstay of the economy. In India, the government targets a 7.6% economic growth during the 12-month ending March 2013, faster than the previous year’s 6.6% rate. The industrial production is targeted to grow at 4.5% as against 3.6% rate in the previous year.
Primarily due to the improved outlook for the U.S., Japan and some of Asia’s export-dependent economies, the recent worries of moderating growth in China seem to have only a modest impact on commodities and stocks. As regards to NR market, it seems to have benefited from a further tightness in the supply while support from crude oil and currencies have been less prominent from mid-March onwards.

The total production of NR from members of the ANRPC fell 12.8% from a year earlier during January 2012. Despite a sharp rise in NR prices since middle of the month, the production fell during January to 291,000 tons in Thailand (from 385,000 tons in January 2011), 239,000 tons in Indonesia (from 247,000 tons), and 85,000 tons in Malaysia (from 108,700 tons) largely due to lacklustre demand from China. However, India and Vietnam managed marginal increases during the month.

 In Malaysia, unseasonal rains for almost a month from 14 February onwards have disrupted harvesting of trees. The Hainan region, which is China’s major rubber-producing belt, has experienced more rainy days during March this year with an unusually cloudy atmosphere, indicating possibility of trees to be affected by powdery mildew disease.

In Sri Lanka, the January, 2012 crop of 13.5 mn kg is lower than the January, 2011 crop of 14.7 mn kg by 8.2%, possibly due to the wintering effect.

Road ahead
NR prices during April and May are likely to be influenced by few factors.  Seasonal shortage in supply will be continued through April. The total supply from members of the ANRPC during March is estimated at 628,000 tons and the output anticipated for April is 647,000 tons. The supply is expected to marginally improve to 759,000 tons during May as farmers resume tapping. These figures are considerably low when compared to the quantity of nearly one million tons produced during December last year.
 On account of the slow output growth (1.1%) anticipated for the current year, the supply may not be comfortable even if the ‘wintering’ season is over.  The prevailing slow economic growth in China is partly due to an on-going shifting of low-end manufacturing to countries with lower wages. The resultant faster economic growth in those countries can partly offset the drop-off in China’s growth. Inflation has already come under control and the government’s focus has been shifted to reviving growth. Sentiments of the economy have started improving on an expected policy easing by the end of this year.

 A rebound already registered in Japanese economy, an improved outlook for the U.S. economy, and cooling of inflation in India offer scope for a faster growth in the global demand for NR.  Stock of NR with China is on a decline. The total stock with traders and Qingdao Free Trade Zone is anticipated to come down to 250,600 tons by May from 356,500 tons at the beginning of the year. This is even after accounting a quantity of 705,000 tons anticipated to be imported during the three months from March to May.

 Crude oil prices are likely to stay high on account of the continuing geopolitical tension and a possible higher demand arising from the U.S. economic recovery.  Substitution is likely to work in favour of NR on account of its prevailing cost-advantage over SR (synthetic rubber). Based on unit value of China’s imports during February 2012, NR stays 10.1% less expensive than SR. The resultant tilt in favour of NR would be more pronounced in Malaysia where latex-based industries dominate the downstream sector.

However, economic growth holds the key in determining rubber prices. While there are clear signals of an improvement in the global economic outlook, the recovery seems to be slow and hesitant. Speculative investors in commodity markets tend to be cautious under such a situation. Although economic trends do not support the possibility of a marked rise in demand or prices in the short term, the prices are expected to improve at a slow pace driven by supply concerns extending beyond the ‘wintering’ season.
(Reference; ANRPC Report, March,2012)

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