Global natural rubber market in the near-term

• What led to a decline in the prices of natural rubber?
• Crude oil and substitution of natural rubber with synthetic rubber
• Did flood in southern Thailand affect the prices?
• How crucial will be the role of economic recovery and growth in automobiles?

The global rubber industry has been under doldrums over the past few years with the demand-supply scenario against the commodity, this pushed it into a surplus. The commodity is mainly used in the automobile industry followed by the healthcare. It witnessed a low demand due to a slowdown in the world economy after the great recession (2008-12).

Furthermore, on the supply side, the industry saw a constant increase in production which further weighed on the demand-supply equation while also negatively affected the rubber prices. However, the natural rubber which was in surplus during 2009-13 (except 2010) rebalanced in the last few years as it moved from surplus to deficit and remained short in the first half of 2017. Televisory’s earlier blog on rubber covered the effect of low crude oil prices on the petroleum derivatives primarily on synthetic rubber, while in the present one the focus is on the natural rubber market and its near-term outlook.  

The natural rubber is derived from a rubber plant and natural rubber constitutes around 44 to 45% of the total rubber consumption globally. Moreover, on the demand side, the overall natural rubber consumption increased from 11,046 MT (2012) to 12,587 MT (2016) and registered a CAGR of 3.3%, while the consumption reached 6,455 MT during the first half of 2017. The natural rubber is largely produced in the Asia-Pacific region with Thailand, Indonesia and Malaysia accounting for a sizeable portion of the production.

Similarly, the consumption dropped while demand recovery was slow in the latter years as the global economy was hit by the financial crisis (2008-09). This pushed the commodity into surplus (2011-13), which led to a decline in the natural rubber prices from USD 4,817 per MT (2011) to USD 2,795 per MT (2013) and the commodity registered a decline of 42%. This continued and the prices reached a level of USD 1,559 per MT (2015) due to a decline in the crude oil prices coupled with the economic slowdown. The falling crude oil prices pushed the synthetic rubber further down, which, in turn, had an impact on the natural rubber prices as well. 

The natural rubber industry showed signs of recovery from June 2016 after a continuous low-price scenario in the preceding 4 to 5 years. The prices of natural rubber climbed to USD 2,543 per MT (Q1, 2017) from USD 1,660 (June 2016). However, the prices declined in the subsequent quarters and reached USD 2,062 (June 17) and USD 1,797 (Sep. 17). The major reason for a sharp rise in the natural rubber prices, especially during March 2017 was the flood in southern Thailand, which resulted in a production loss of roughly 400,000 MT for the commodity and ~3% of output. This led to a supply constraint in the market and helped in an increase of the prices.

The crude oil prices also improved by the end of September 2016 as the OPEC curtailed oil output. Hence, synthetic rubber which is a petroleum derivative also witnessed price rise after the increase in prices of black liquid. In addition, as synthetic rubber moved at a high pace and imitated crude oil, this led to a speculation on the substitution of synthetic with natural rubber and lent support for the latter. Additionally, China, which is the largest global consumer for both types of rubber products also saw a stabilisation in its economy and reduced taxes on locally manufactured sales of cars, this further increased the demand for natural rubber. The nation consumes nearly 40% of the global natural rubber and better economic prospects impacted the consumption of rubber to a large extent. 

According to the International Rubber Study Group, the natural rubber demand was projected to increase by 3.5% or 13.03 million MT (2017) and 2.4% or 13.34 million MT (2018). Nevertheless, natural rubber production may outpace the demand as the area occupied for tapping was anticipated to increase internationally by 350,000 hectares in 2017. The major producers are proactively working to cap the estimated excessive supply and did announce export cuts. In late Dec. 2017, Thailand, Indonesia and Malaysia pronounced their decision to withhold exports of ~350,000 tonnes of natural rubber to support prices and aid the market balance.

The World Bank’s forecasts on the global economic outlook suggest a growth of 3.1% (2018) after a much stronger than expected recovery in the investment and manufacturing in 2017. The global economic growth in 2017 was 3%, which was a positive revision from the initial estimate of 2.7%. The recent increase in the major consumption led commodity prices was also a reflection of the recovery in the world economy (2017).

The increase in the automobile sales (international) is also a positive sentiment for the rubber market. Automobile sales increased to 83.64 million units (2017) as compared to 72.62 million units (2012) five years ago and registered a CAGR of 2.9%. The major nations like China, the USA, Russia, Japan, Germany and the UK demonstrated a moderate increase or stabilised numbers for 2017 with most hovering near their record levels. Hence, backed by a better global economic prospect, the auto sales seem stable to positive which is eventually expected to increase the tyre demand and aid rubber consumption.

In conclusion, the latest trends and developments support moderate optimism in rubber prices for the near-term. The natural rubber market which is presently under moderate balance to deficit situation is likely to remain balanced in the near-term. The stable crude oil prices amid a continued commitment from the OPEC also support rubber prices. Televisory is of the opinion that the natural rubber prices will remain moderately positive to stable. The risk factors which can act contrary to Televisory’s view are the lack of commitment and continuity among the three nations (Thailand, Indonesia and Malaysia to curb export) as well as the natural rubber output outpacing the demand.