Features

NR market not expected to rebound in near future

17 Jul 2014 - {{hitsCtrl.values.hits}}

Rubber market in Southeast Asia dropped during the week as Chinese interest was low in buying.
Tyre makers were banking on rubber stocks in bonded warehouses in Qingdao, the main rubber manufacturing province and very few searched for rubber from the Southeast Asian markets.

The price of sheet rubber RSS 3 declined from $ 2.10 to $ 2.05 a kg in the Bangkok market and block rubber SMR 20 moved down from $ 1.77 to $1.74 a kg in Kuala Lumpur. However, latex 60 percent was more or less steady around $ 1.48 a kg as supply barely matched demand.

Futures market at the Tokyo Commodity Exchange for December delivery also dropped a little from $ 214 to $ 211 yen a kg for RSS 3, mainly on the price of crude oil falling by about a dollar on encouraging signs of supply from Libya and Iraq.

The fraud investigation at Port of Qingdao on metal financing and the consequent decline in financing deals in commodities including rubber, continued to haunt the market. The investigation dampened market sentiments to the extent of discounting China’s factory activity, hitting multi-month high in June and report about the U.S. manufacturing activity steadily rising in June, helping automobile sales to hit the highest in almost eight years.

Rubber industry performance by IRSG
Recent economic development indicates, the global economy to continue to recover the slowdown of Japan’s economy that was halted and GDP grew by an impressive 1.6 percent quarter-on-quarter in 2014 Q1.

Euro area GDP is gaining momentum in 2014 Q1 and it is projected to grow 1.2 percent this year. The USA economy contracted substantially in 2014 Q1, due to harsh weather conditions. The second quarter of 2014 points to an acceleration of economic growth.

Economic growth in emerging markets continues to be in a disappointing state. Chinese GDP figures are diverging from indicators which describe the manufacturing sector more closely. India continues to grow slowly, Russia’s as well as Brazil’s economy are going through recession.

Asia

IRSG’s leading indicator of China’s economy (rail freight traffic) has again dipped into negative growth territory. Although there seems to be a trend reversal, positive growth has not yet resumed. Available indicators, such as Chinese PMI which has also stayed below the 50 mark since the beginning of the year, point to a general slowdown in the manufacturing sector. General output data that is GDP, might belie a weakening of the overall Chinese economy.

Although Japanese GDP slowed down during the last half of 2013, the first quarter of 2014 indicates GDP to obtain momentum again and this is confirmed by the latest industrial production data. This momentum is largely driven by private consumption which in turn is apparently caused by frontloaded demand in advance of a consumption tax increase in April 2014. There is a sharp dip in April 2014 and a contraction of output is expected as spending rebalances towards lower private consumption. Lower levels of growth are expected for the last two quarters of 2014.

Euro area
Euro area GDP growth continues to be positive and industrial production continues to be on an upward trend. This trend is also driven now by recovery of former sovereign debt crisis countries, such as Spain. Due to continued low inflation rates, the ECB has announced that they will increase monetary sup-ply through targeted credit lines in credit-stricken countries in the periphery of the common monetary area. This development should support current economic growth forecasts.

Americas
Economic growth significantly dropped in the USA in Q1 2014. This is largely due to bad weather conditions (harsh winter) and partly due to larger negative contribution from inventories and retrenchment of private fixed investment. Yet, the USA economy is poised to grow even more in 2014 as industrial production and the PMI have been consistently strong through out most the first half of 2014.

Major differences across the remaining Americas continue to exist. In Brazil, the economy persists to be weak with industrial production still stagnating at pre-2010 levels as counter-cyclical policies are constrained by a high inflation environment. Mexico continues to be on an upward trajectory and it will benefit from increased external demand, especially from a buoyant USA economy.

Total rubber consumption
Total world rubber consumption increased by 4.3 percent in Q1 2014, carrying on the relatively higher rates of growth of the last three quarters of 2013 into 2014. The growth rate of the total world rubber consumption has been an average 4.4 percent in the four quarters to Q1 2014 as compared to an average 0.1 percent for the four quarters to Q1 2013.

Sustained world economic expansion, especially the advanced economies, is the underlying reason for the relatively high growth rate of Q1 2014. Despite the severe winter, the economy of the USA had expanded by 1.5 percent in Q1 2014, while the economy of the EU-28 increased by 1.4 percent in the same period, accelerating from 0.1 percent in Q2 2013.

Concurrently, in Q1 2014 and specific to the rubber economy, the exports of automobile tyres of the EU-28 increased by 6.3 percent, while the sales of total vehicles increased by 6.8 percent (total tyre exports are used as a proxy for the total domestic automobile tyre sales, where sales to outside the European Union accounted for 18.9 percent in 2013). In the USA, the total sales of automobile tyres were up 6.2 percent in Q1 2014, following on from a 2.0% increase in Q4 2103.
Much of the growth in the total rubber consumption, however, was concentrated on China and the Asia-Pacific (excluding China). The two regions are responding to the sustained growth in external demand for finished rubber products and to the continued recovery in the domestic demand, which explains their respective increases in demand for rubber. In China, the exports of total automobile tyres increased by 13.2 percent, while in the Asia-Pacific (excluding Asia)1 the exports of automobile tyres increased by 9.0 percent, while total domestics sales of automobiles in Asia was up 7.9 percent in Q1 2014

World natural rubber (NR) consumption
The world natural rubber (NR) consumption increased by 4.1 percent in Q1 2014 . While all the regions had recorded positive growths in Q1 2014, the majority of the absolute incremental increases (68.5 percent) were made by China and the Asia-Pacific (excluding China) even though the EU-28 and the USA were the regions with the fastest growth rate.

The asymmetrical growths are a reflection of the absolute size of NR consumption of the two Asia-Pacific regions and the relatively weak growth rates of the two latter regions in the same period a year ago.

The growth rate of the world NR consumption is an absolute 0.2 percent below that of the growth rate of the world total rubber consumption in the same period in 2013, despite the relative rubber price favouring greater consumption of NR.

Fundamentally, the demand for NR is stronger as compared to demand for total rubber, on balance: in Q1 2014, exports of total commercial vehicle tyres (which consumes relatively higher proportion of NR) increased by 11.6 percent as compared to 8.8 percent increase for exports of total automobile tyres, while commercial vehicle sales were up only 0.1 percent as compared to 4.7 percent increase for total automobiles over the same period. Exports of tyres are used as a proxy for replacement tyre sales, while vehicles sales are used as a proxy for original equipment tyre sales.

China is the specific cause of this relatively weak growth rate, where NR consumption increased by an absolute 4.5 percent, slower than its respective total rubber consumption over the same period in 2013. However, also for China fundamentally the demand for NR is stronger as compared to demand for total rubber, on balance: in Q1 2014, its exports of commercial vehicle tyres increased by 17.9 percent as compared to 13.2 percent for exports of total automobile tyres, while commercial vehicle sales were up only 0.1 percent as compared to 4.7 percent increase for total automobiles over the same period. Thus, the relative weaker growth in NR consumption in Q1 2014, for both China and the world, does not lie with any weakness in the fundamentals, but appears to be a reflection of process of adjustment somewhere along the NR supply-chain.

NR production
World NR production increased at a sharply decelerating rate in Q1 2014, slowing down to 1.2 percent from 14.0 percent in Q4 2013 The deceleration is mainly a reflection of the equally sharp slowdown in Thailand, with its NR production growth rate falling from 40.1 percent in Q4 2013 to 4.5% in Q1 2014 .

For the second consecutive quarter the NR production of the Other Asia-Pacific decreased, falling by 4.1 percent as India, Malaysia and Vietnam continued to experience negative growths in their NR outputs.

NR balance
The decelerated growth in NR production in the face of continued robust growth in NR consumption created a small deficit in the world NR market in Q1 2014 .

NR stocks
A 70,000 tonnes world market deficit in Q1 2014 on the world NR stock was seen.

NR exports
The global natural rubber (NR) exports increased by 5.3 percent in Q1 2014. The growth decelerated in Q1 compared to the strong growth observed in Q4 2013. Exceptional exports growths in Q4 2013 led to a rebalancing in the next quarter. However, Q1 2014 exports growth was the highest first quarter growth in the last five years.

The major driver of the quarter on quarter deceleration in Q1 was on account of the slowdown in exports of major producers driven by slowing import demand in China. However, improving consumption across the regions further supported Q1 exports from major producers in Asia-Pacific as well as exports growth in EMEA and Americas in general. Acceleration in import demand growth across the EU-28 and USA attributed to a strong exports growth from EMEA and Americas in Q1 2014.

Futures market price activities
Since March, NR spot and benchmark prices continued to fall across all three major rubber future markets.

Beyond other global factors, the price drop to almost 1800 (US$/Tonne) has been largely blamed on general poor economic performance in China as well as Chinese buyers defaulting on contracts. Following Chinese New Year, the daily turnover at the Shanghai futures market (SHFE) shot up tremendously.

In early and late March 2014, TOCOM and SGX moved into backwardation, respectively. Whereas TOCOM moved back into contango in late April, SGX has stayed in backwardation since then. Backwardation is usually an indication of tight spot supply, yet market sentiment has been weak. Although stock piling has been an issue in China, backwardation at TOCOM as well as SGX should force market participants to sell their inventories.( Referance; Rubber Industry Report, April to,June, 2014, IRSG)

(The writer can be contacted at [email protected])

Features

NR market not expected to rebound in near future

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