NR price forecast

The Rubber Economist Ltd

NR price forecasts

What is the likely trend of natural rubber prices for the rest of this year and next?

There have been signs pointing toward a weakening in natural rubber (NR) prices. In fact, NR prices have declined by more than 10% since it reached its peak of 3.25 US$/kg in early July. If the strength of oil prices are a factor supporting NR prices, then it is no surprise to see that oil prices have also fallen from a record high of 147 US$/barrel in July to under 120 US$/barrel currently.

Demand for NR is likely to slowdown quite sharply this year and next. The Rubber Economist Ltd forecasts a fall of global NR consumption from 5.5% in 2007 to only 3.0% in 2008 and 3.8% in 2009. The High price of petroleum and the economic crunch will cause a global economic slowdown and with it a slower demand for rubber.

Slower demand in itself does not always mean a decline in rubber price. Firstly, the price of oil is unlikely to continue to fall much further. Despite the global economic slowdown, its price can still be influenced by news on the supply side, such as political conflicts around the world and bad weather factors such as hurricanes hitting the Gulf of Mexico. Average oil prices of around 110 US$/barrel for this year and next are quite plausible.

Since oil prices may be stable for a while, the main influence on NR prices will be the physical supply of NR, which has also been largely influenced by weather factors in recent years. During the past three years, despite increasing prices, the output in two of the top three producing countries, namely Thailand and Malaysia has increased by an annual rate of less than 1%. In addition to the weather, the weakened dollar relative to the Thai Baht and Malaysian Ringgit and the influence of hedge funds and speculation in futures markets played a major role. The average 3.5% annual increase in the world output during 2005-07 has come from Indonesia and other producing countries. The Rubber Economist Ltd predicts the growth in NR supply to increase by 3.1% in 2008 and 2.4% in 2009.

Global NR stocks have been increasing since the middle of 2006 and are expected to continue to do so this year before the trend reverses in 2009. Total stocks at the end of next year are estimated to be around the same level as 2002 when NR prices started to rise. The tightness in the NR market becomes apparent when examining the ratio of stocks to consumption. In 2002 the stocks ratio fell to a critical level, lower than 3.5 months, then prices started to increase. Despite the recent rise in the absolute amount of stocks and relative to consumption and exports, prices remains high because the ratio is still at historical lows and this trend is expected to continue this year and next. The Rubber Economist Ltd believes that NR prices are expected to return and remain above 3 US$/kg by next year.

With oil prices remaining high but stable while the NR stock to consumption ratio continues to be at a historical low, this will influence the relative rubber prices such that the share of NR to total rubber consumption may decline during this period.

For a more details of rubber forecasts of consumption, production, stocks and prices please contact The Rubber Economist Ltd at [email protected]

The Rubber Economist Ltd

28 August 2008

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