Industrial Pricing

The Rubber Economist Ltd

A place for industrial pricing in the rubber industry

The purpose of this paper is to summarize the concept, the origin and list some of the pros and cons and advantages and disadvantages of ‘industrial pricing’. The discussion concerns with whether natural rubber (NR) can still be considered as a commodity as opposed to an industrial, or more accurately a manufacturing product. Traded goods are normally categorized as primary commodities or manufactures, depending on the degree of processing embodies in them. However the boundaries between these two groups are quite vague. Few primary commodities enter the markets without some form of processing. It therefore sometimes unclear as to where processing ends and manufacturing begins.

The importance of differentiating between primary commodities and manufactures is because that raw material that is unprocessed primary commodities is more homogeneous than manufacturers, i.e. primary commodities that have undergone extensive processing. Homogeneous raw materials markets are characterized by a highly competitive structure as a result of the large number of buyers and sellers trading in the market. Information about prices and quantities traded, which are determined by competitive bidding between buyers and sellers, are simple and readily available. By comparison, the markets for manufactures are dominated by a small number of producers traded with a small number of highly specialized buyers. They are less transparent as special trading arrangements are used and much of the information on prices and trade volumes remains with the trading companies. Quite often prices are fixed by adding a profit margin to the cost of the product. Industrial prices occur as the product are ‘heterogeneous’, differentiated by the colour of the package, brand names, etc, as opposed to ‘homogeneous’ goods associated with competitive pricing of commodities.

It has been argued that NR has become closer and closer to an industrial product and further away from being a primary commodity. NR becomes increasingly differentiated either by country of origin, brand names, or increasing value-added. Producers are differentiated their products, not only with the same countries but also among different countries, differentiate their rubber by quality and the quantity produced. International rubber trade is further differentiated between producers, e.g. sometimes the contracts signed by an agency house specify the name of the factory of origin for TSR grades and the name of the manufacturing factory overseas. There seems to be differences in demand/supply for different markets with the prices being quoted for particular grades and types of NR for different producers and quality. There has also been an increase in the number of producers which trade with a small number of highly specialised buyers creating special trading arrangements. Each seller has some feature of his product that distinguishes it from other goods, either in fact or in the minds of purchasers. What is happening is that the NR market is moving away from ‘perfect competition’ towards an industry best labelled as ‘monopolistic competition’.

There are many reasons to this including technological and economic situations in the consuming countries have changed, e.g. manufacturers have adopted quality management systems such as SPC, ISO 9000, GMP, JIT, etc. This requires a closer relationship between consumers and producers for a greater consistent in quality, specification, etc. At the same time high costs of production has pushed some producing countries to find new and profitable types of rubber and to improve their productivity. They put greater efforts in producing special and modified NR and to differentiate their output from other producers. Their products are increasingly considered as an industrial performance raw material with high value-added.

NR can be traded as industrial product by agreement under long-term sales contract, negotiating between individual buyers and sellers on the condition of demand/supply, cost situation, etc. This system, which includes cost plus pricing concept, is used for many industrial minerals such as bauxite, iron ore and manganese, etc. Another way is a contract price between producers and consumers and is based on a reference price such as list prices of synthetic rubber (SR) or a price determined by a committee to reflect the prevailing state of supply/demand.

There are many limitations of industrial pricing, e.g.

•Not all NR is fully processed before being sold, and the first stage of rubber processing (to RSS or TSR) adds little value;

•One cannot just turn the supply line for NR on or off;

•NR is subject to uncontrollable events;

•Knowledge of the costs of production is possible for estates but not necessarily for smallholders;

•Costs of production and alternative investments vary;

•May be difficult to come up with accurate figures for imponderables (land use, smallholders welfare, etc.);

•Market power with large producers and consumers;

•Demand/supply factor only applies after time lag;

•Time and effort to educate the parties;

•Curtails competition and competitive pricing will make the open market less effective;

•Reduction in price fluctuations may reduce volume of futures;

•With the list price published in advance, there is an uncertainty of price through discounts; and

•NR is different from SR in terms of its industrial structure.

Despite these limitations, market participants including producers are keen in looking into the possibility of using ‘industrial pricing’. One comment to this author many years ago was that, “Why should prices of tyres and manufactured products move up with time, whilst that of NR goes down in the face of rising cost of production and increasing demand? When employees of tyre markets go on strike they get an improved wage agreement. When tappers go on strike, the NR price is unaffected but their earnings are greatly reduced.”

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