Commodity prices in 2008

The Rubber Economist Ltd

A lot of people tend to associate natural rubber (NR) price with oil price mainly because synthetic rubber (SR) is based on petroleum. There is nothing wrong with this but the substitution effect between NR and SR due to the change in price of oil does take time and there is a limited amount of substation. The trend of NR and oil prices in 2008, which rose to a record level in July and then fell sharply to end the year at the lowest level since 2005, is not unique. A similar trend is also evidenced in other commodities (see the graphs below).

Commodity prices, 2002-2008

Hence, there must be a common factor influencing commodity prices. One obvious factor is the global economic situation. However, the economic factor, which influences commodity demand, cannot be judged by itself. One needs to evaluate the demand in relation to supply. A slower demand can still leave a commodity price higher if supply falls even sharper than demand. More importantly, the economic impact takes time to feed into the picture. This means the sharp fall in commodity prices must be caused by other factors. One of these factors is speculative buying into the commodity by investment funds, which was one of the factors influencing commodity price rise and fall in 2008.

Another very important factor is the exchange rate movement and in particular the value of the US dollar, which is used in international trading prices of many commodities. The change in value of the US dollar has influenced both consumers and producers. In general, a weaker US dollar results in higher commodity prices and vice versa. This certainly is true for NR and in particular in 2008 when the US dollar began by depreciating against other currencies before it started to sharply appreciate since July. The positive trend of the price of TSR20 in Singapore and the rate of exchange rate between US dollar and the SDR rate can be clearly seen in the graph below.

Rubber price and SDR rate, 1990-2008

So, in conclusion it is important to pay attention to the exchange rate movement when one needs an explanation for rubber price movements. The impact on the exchange rate to different commodity prices varies depending on their demand/supply elasticities and specific demand/supply balance for each individual commodity. Contact [email protected] for rubber price forecasts or any problems you may need an answer to.

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