Quarterly Report

Highlights

•World rubber consumption declined -3.6% in 2008, slightly more than previously estimated because of the worse-than-expected performance in Asia/Pacific.

•The outlook for 2009-2011 is also gloomier than the earlier forecasts, i.e. -1.8% annually.

•Despite a weak performance, Asia/Pacific is the only region expected to show a positive growth rate.

•NR performed better than SR last year and possibly will continue to during 2009-2011.

•Despite a slowdown in demand, NR output is expected to continue to increase leading to a further increase in global stocks.

•Unlike NR, SR output is forecast to show a decline, but not enough to slow down the increase in stocks.

•Despite an expected increase, NR stocks to consumption ratio is still relatively low. This coupled with a possible depreciation in the US dollar may produce a further rise in NR prices.

Rubber consumption

World rubber consumption in 2008 declined slightly more than previously estimated at -3.6% from 23.51 million tonnes to 22.67 million tonnes (Figure 1). This was mainly due to the worse-than-expected performance in Asia/Pacific as the world largest consuming country, China, shows a decline of -1.2% rather than an increase of 0.6% as stated in our previous report.

Figure 1: Global total rubber consumption, 1970-2011

Furthermore, the outlook for 2009 to 2011 also looks to be gloomier than the earlier forecasts. This year the continued downturn in rubber consumption is pushed back to -10.7% and the improvements in 2010 of 2.6% and 2011 of 3.3% will not be fast enough to pull the average growth rate for the three-year period into a positive figure, i.e. -1.8% (Figure 2).

Figure 2: Growth rates of rubber consumption, 1970-2011

As can be seen from Figure 3, despite a relatively weak performance, Asia/Pacific is the only region expected to show a positive growth rate for the period 2009-2011, i.e. 2.0% as compared to European Union or EU (-8.5%), North America (-7.4%), Latin America (-7.1%), other Non-EU Europe (-6.8%) and Africa (-2.5%).

Figure 3: Regional rubber consumption, 1990-2011

As can be seen from Figure 4, the sharp decline this year and the recovery thereafter globally, depends significantly on the performance of China. Last year, China’s rubber consumption declined for the first time in 10 years as the industry experienced a negative effect of the global economic slow down. However, we estimate that the downturn in China’s rubber consumption has bottomed out and should recover in the second half of this year to show a positive growth rate by the end of the year.

Figure 4: World growth rate – with and without China,1970-2011

Last year, synthetic rubber (SR) consumption fell by -5.3%; from 13.28 to 12.59 million tonnes (Figures 5 and 6). This was worse than the decline of -1.4% for natural rubber (NR), i.e. from 10.23 to 10.09 million tonnes. As a result, the percentage of SR consumption declined by one percentage point to 55.5% last year (Figure 7). The outlook also anticipates that NR will show a slower decline than SR, i.e. an average of -1.5% and -2.0%, respectively. This means the forecasts expect the percentage of SR in the world total rubber consumption to fall further to 54.9% by the end of 2011.

Figure 5: World NR and SR consumption, 1990-2011

Figure 6: Growth rate of world NR and SR consumption, 1990-2011

Figure 7: Percentage of global SR rubber consumption,1970-2011

On a regional basis, the fall in global SR share last year was mainly the result of North America and Asia/Pacific (Figure 8). The forecast expects the decline in SR shares in Asia/Pacific and Africa to influence the global SR share negatively, causing it to fall further during the forecasting period.

Figure 8: Regional SR share, 1990-2011

Table 1 presents the estimates and forecasts of rubber consumption for the world and major regions for the period 2007 to 2011.

Table 1: Forecasts of rubber consumption (‘000 tonnes)

Rubber production

As mentioned in the previous report, despite a sharp decline in Malaysia (-10.6%) and a fall in Indonesia (-0.2%), the record high prices in the first half of the year helped to stimulate a small rise in output in Thailand (1.1%) and many smaller producing countries and succeeded in pushing world output up by 2.0% from 9.69 in 2007 to 9.88 million tonnes in 2008 (Table 2 and Figure 9).

Figure 9: World NR production, 1970-2011

This year declining prices and weather problems have resulted in a decline of output in many NR producing countries. This year anticipates the decline as being as high as 4-5% worldwide. However, a sharp pick up is expected in 2010 and 2011. Hence, for the three-year period, despite a slowdown in demand, NR output is expected to continue to increase by an average of 2.2%.

Table 2: Forecasts of NR production (‘000 tonnes)

Among the major NR producing countries, the output in Indonesia, Vietnam and India has been gaining relative to that in Thailand, Malaysia and China in recent years (Figure 10). India is forecast to overtake Malaysia, while Vietnam is also closing in on these two countries. The relatively rapid increase in the output in Indonesia and Vietnam as compared to Thailand and Malaysia has partly been influenced by their export sectors and because of their relatively weak currencies (Figure 11).

Figure 10: NR production in major countries,1990-2011

Figure 11: Currency movements in NR exporting countries, Jan ’00-Aug’09

World SR output declined sharply by -4.6% from 13.43 to 12.81 million tonnes last year (Table 3 and Figure 12). The declines were mainly in North America (-13.6%), EU (-6.8%) and non-EU Europe (-6.3%) because of a slowdown in their domestic and export markets (Figure 13). There were increases in Latin America (1.0%), South Africa (9.9%) and Asia/Pacific (0.2%). The growth rate in Asia/Pacific fell sharply from 11% in the previous year.

Figure 12: World SR output, 1970-2011

Figure 13: Regional SR production, 1990-2011

Unlike NR, many SR consumers are also SR producers, allowing them some flexibility. Hence, the trend of SR output generally follows closely that of consumption. Though the forecasts also predict a sharp decline in SR production this year, a gradual recovery in 2010 and 2011 is expected. The marginal decline of only -0.1%/year during the next three years is relatively small compared to that of consumption.

Table 3: Forecasts of SR production (‘000 tonnes)

The aggregate rubber economy

Table 4 ranks countries in 2008 according to total rubber consumption and production (combined) – to reflect all rubber industry stakeholders including tyre or general rubber product manufacture as well as raw material suppliers. The world rubber economy has and will be increasingly dominated by Asian countries. In 2008, Asian countries comprised 7 of the 10 largest rubber economies.

Furthermore, by 2011 Indonesia and India will over take Japan for the fourth and fifth place respectively behind China, USA and Thailand (Table 5). We can conclude, from examining this ranking that the world rubber industry is shifting from the West towards Asia/Pacific and will continue to do so in the coming years. By 2011, Asia/Pacific is expected to account for more than two-thirds of the total global rubber industry.

Rubber stocks

As a result of a recent revision in estimating Chinese rubber consumption to take into account the compound rubber imports more accurately, the amount of rubber consumption, particularly of NR, is now higher than the earlier estimates. As a result the picture of rubber stocks is now quite different from before. The decline in NR stocks since 2000 has been a lot sharper than the earlier estimates (Figure 14 and Table 6). What has not changed is the forecasts of a sharp slow down in demand relative to supply for the next three years, meaning that NR stocks will increase quite sharply during this period. This is not so surprising since the decline in rubber consumption this year is expected to be the worst since 1942. A drastic decline in consumption will cause a drastic rise in rubber stocks.

Figure 14: Global NR stocks, 1990-2011

Table 6: World NR supply/demand balance,‘000 tonnes

Compared to NR, the historical trends of SR stocks have not changed a great deal after the adjustment to the Chinese statistics (Figure 15 and Table 7). However, the forecasts are now expected to rise quite sharply for the next few years, similarly with global NR stocks.

Figure 15: Global SR stocks, 1990-2011

Table 7: World SR supply/demand balance,‘000 tonnes

However, as discussed in detail in the last report, the important point is the ratio of rubber stocks to the level of consumption, which is shown in Figure 16. NR stock to consumption ratio is now expected to rise to just above 3 months of consumption, i.e. the level reached in late 2002. When compared to NR, stock to consumption ratio is less important with SR, as production tends to follow closely the level of consumption. SR is a typical captive product in that it is consumed by its own producers and a substantial amount is not marketed at all. Furthermore, unlike NR, the cost element rather than the stock consumption ratio is the more important factor to the administrative pricing for SR producers.

Figure 16: Stocks to consumption ratio, 1990-2011

Trade balance

To complete the picture of consistency for the global rubber industry as a whole, one needs to examine the regional trade balance for both NR and SR (Figures 17 and 18). The estimates and forecasts of NR and SR for all the countries has to be checked for consistency such that the regional trade surplus balances out the trade deficit, leaving the world figures in balance. As expected, the NR producing regions, Asia/Pacific and Africa hold the trade surplus while all other regions the trade deficit. For SR, traditionally, North America and Europe provide the major trade surplus while Asia/Pacific is the major deficit region. However, increasingly Asia/Pacific has started to turn the situation around.

Figure 17: Regional NR trade balance, 1990-2011

Figure 18: Regional SR trade balance, 1990-2011

Rubber prices

Before getting into a discussion of recent and forecast rubber prices, we would like to present our readers with a brief explanation of factors influencing NR prices: short vs. long term and fundamental vs. nominal.

The time frame dividing short, medium and long term varies from situation to situation. In our own view of examining the outlook for NR prices, short term is referred to as a period up to a few months, medium term up to 4-5 years and long term beyond 5 years. The fundamental factors influencing NR prices are demand and supply of NR while all other factors only indirectly affect prices through the changes in the demand and supply.

In the long term, there is a general belief, held by the Rubber Economist Ltd among others that there will be a structural surplus for many commodities. This is because of a long-run tendency for commodity consumption to decline while there is a tendency for production output to increase due to various factors such as technological innovations. However, there is a factor, which may cause NR prices to increase in the long term. This is due to the fact that NR is unique in that the three major producing countries, namely Thailand, Indonesia and Malaysia, are among the world’s fastest growing economies. This factor will cause global demand to continue to rise and the increase in supply to decline, hence, the NR industry will eventually face shortages.

In the medium-term, elastomer prices depend mainly on the cyclical movement of the world economy, which is expected to show a period of moderate recovery from the recent deep recession. There will be movements along this gentle upward phase of the rubber cycle, influenced by various short-term factors such as weather, currency movements, futures markets activities and irregular demand. In this report, our concern is primarily on the short and medium term outlook.

In the last report we examined the myth of NR deficit/surplus and prices in great detail. The conclusion was that for NR, the stocks/consumption ratio not the total stocks is the more important factor in determining its price, i.e. a lower ratio generally implies higher price and vice versa. The previous report also discussed the common factor influencing commodity prices such as the global economic situation, speculative trading and currency movements. For currency movements, specifically the depreciation in the US dollar tends to result in a rise in NR prices and vice versa.

Figures 19 and 20 update the comparisons of commodity prices up to the end of June 2009. As can be seen not just NR but all commodities have enjoyed a revival in their price trends during the first half of this year.

Figure 19: Commodity prices, Jan ‘02-Jun’09

Figure 20: Commodity prices, Jan ‘02-Jun’09

How much currency movement affects commodity prices depends on the individual factors influencing each commodity. During the last two years, oil has been influenced more by currency movements than NR because there is more news about the physical trading of the latter than the former. Historical analyses also show that in general currency movements have more impact during the downward trends than the upward ones. This was certainly true for NR when the sharp appreciation of the US dollar during the second half of last year resulted in a sharp decline in NR prices (Figure 21). However, the depreciation in the dollar this year has not equally produced an equivalent upturn in rubber prices. Perhaps, this year the resistance of NR price to a rise was partly because the strength of physical demand was not very strong. Nevertheless, NR price has picked up quite sharply since early July to nearly 2.00 US$/kg.

Figure 21: Recent trends of currency and NR prices, Jan ‘08-Sep’09

As for the outlook of NR prices, as seen in Figure 15, the stock/consumption ratio is forecast to increase. Despite the expected rise, the ratio is still relatively low in historical context - not much beyond the level reached towards the end of 2002 when NR price began its steady upward trend. As for the strength of the US dollar, our assumption is that during the recovery phase of the world economy, we may likely see depreciation in the US dollar (Figure 22). Hence out forecasts give a further rise in NR for this year and next before a possible turnaround by 2011 (Figure 23). Specifically, NR prices may reach as high as 2.70 US$/kg towards the end of next year – well below the height of 3.20 US$/kg reached in July 2008 - before falling back to around 2.20US$/kg by the end of 2011.

Figure 22: The assumption on the rate of US$ to SDR

Figure 23: NR price forecasts to 2011

As for SR prices, its premium relative to NR reoccurred in the second half of 2008, but it disappeared in early 2009 (Figure 24). However, things could change when the statistics are updated. There has been news of a sharp increase in SR prices due to a tight supply of its basic feedstock, i.e. butadiene. Supply of butadiene, a by-product of ethylene production, has been reduced as ethylene-producing units in the US have been shutting down or reducing production because producers shift to gas-based feedstock from crude oil-based material due to the economic slowdown.

Figure 24: Relativity of NR and SR prices, Jan ’03-May’09

However, the recent increases in NR shares may also be linked with the fact that NR generally performs better than SR because of the greater resilience of the commercial vehicle (CV) sector and NR’s relative strength in the CV sector.

In general, there are certain circumstances in which rubber demand and possibly rubber prices will rise. The cash-for-clunkers incentive programme in US, Europe and other parts of the world – cash in return for trading in old cars - has caused an increase in new car sales and hence tyre and rubber demand. On the other hand, the impact is only on the passenger car segment. Furthermore, it is a short-term impact and might even have a negative impact on future demand if buyers advance their buying decisions to take advantage of the government subsidy. New cars sales also mean a slowdown in the replacement tyre market.

With regards to replacement tyres, US companies have recently stopped importing light CV and passenger car tyres from China amid fears that the US government may slap punitive taxes on Chinese tyres in the latter part of September. Obviously a slowdown in tyre output in China will have some impact on rubber demand.

Regardless, in general there has been more positive economic news in major consuming countries, including the United States, Japan and European countries. This, as discussed earlier may only produce a gentle improvement when compared to the sharp down turn experienced in 2008 and expected this year.

This section provide to our website readers a free sample of our earlier version of the quarterly report. Interested readers please contact [email protected] of how to subscribe to the latest version.

Home (New)