Rubber to surge on supply cut, China demand

Rubber to surge on supply cut, China demand

Prime Sarmiento, Dow Jones, Singapore

Skyrocketing natural rubber prices will continue zooming next
year on supply cutbacks by producers and strong Chinese demand,
albeit at a more moderate pace, traders and analysts said.

Price of benchmark Thai ribbed smoked sheet 3 grade could
surge to as high as US$1.00 a kilogram, even after having more
than doubled this year to a high of 95 cents a kilogram, from
around 46 cents per kg in December 2001, a 30-year low, they
said.

Traders said in the course of next year, the market may breach
85 cents on the downside, but will certainly keep above a strong
psychological support area of 80 U.S. cents per kg.

RSS 3 was offered Wednesday at 84-85 U.S. cents per kg for
December-January shipment.

"Assuming wintering and weather patterns in general are
normal, I believe that rubber demand will improve at a faster
rate than supply, particularly if the policy actions of ITRO
(International Tripartite Rubber Organization) are effective,"
said Prachaya Jumpasut, head of economics and statistics of the
London-based International Rubber Study Group, or IRSG.

ITRO was formed in Bali by top rubber exporting countries
Indonesia, Thailand and Malaysia in December 2001 to arrest the
rapid decline of rubber prices. ITRO members had pledged to cut
exports by 10 percent and production by 4 percent starting 2002
to boost depressed rubber prices.

ITRO member countries have started cutting exports and
production this year. Although news concerning ITRO's initiatives
to shore up prices have been positive to the market, traders and
analysts believe this development only played a supporting role
in this year's bull run.

Rather, rubber had been weather driven, they said.

In the first half of the year, wintering season, or the long
dry spell, parched rubber growing areas in Southeast Asia.

The second half year saw the monsoon season halting rubber
tapping. Bad weather conditions curtailed the flow of latex from
rubber trees.

Market participants said ITRO's reduction of exports and
output aren't the only factors that would limit overall rubber
supply. Its planned rubber stockpiling program, which will be
implemented by the International Rubber Consortium Corp., or IRCo
will also underpin the market.

"If the reduction in output and exports won't work then IRCo
will buy rubber in the market," said Suharto Honggkosumo,
executive director of the Rubber Association of Indonesia,or
Gapkindo.

"Should the policy actions of IRCo be effective, it will
surely lend a hand in boosting natural rubber prices," Prachaya
said.

IRCo formally established in August is tasked to procure
rubber from farmers, withhold it to stabilize prices and later
sell rubber directly to end- users.

IRCo was expected to have started operations in mid November.
But it isn't functioning yet as Indonesia and Malaysia have yet
to appoint their representatives to IRCo's management team. It
also needs additional funds as it has only received a $3 million
financing from Indonesia, Thailand and Malaysia.

The countries have earlier pledged to raise a total of $225
million for IRCo's operations.

"If the organization (ITRO's member countries) ever actually
opens its doors and opens the wallet, prices will improve,
however temporarily...But skepticism over the efficacy of such a
venture is deep-seated within the trading community, born no
doubt of years of bearish conditions," said one senior rubber
trader in the U.S.

Indonesian Trade Minister Rini Suwandi has repeatedly stated
that the cash- strapped Indonesian government could barely scrap
additional funds to line the IRCo's pockets. Thai and Malaysian
officials have earlier said they have the money to support IRCo.

Newin Chidchob, Thailand's Deputy Minister for Agriculture and
Cooperatives, said the $3 million initial capital outlay will
only be used to finance IRCo's administrative expenses.

For additional funds, Newin said ITRO can ask financial
institutions and banks for monetary support.

He said the IRCo could receive rubber from farmers and have
banks issue letters of credit to the farmers to guarantee that
payment for the rubber will be received by the consortium. The
rubber would then be traded, and some of the income received
would be paid back to the banks.

Rubber prices have always been linked to the U.S. economy as
the U.S. has been the world's leading natural rubber consumer. A
robust U.S. economy equates to higher car sales and, ultimately,
increased rubber imports from the U.S.

But for 2003, market participants have set their eyes, not on
the U.S., but on China as its appetite for natural rubber has
outstripped that of the U.S.

Data culled from the IRSG reveal that China has dislodged the
U.S. as the world's biggest consumer of natural rubber.

In 2000, the U.S. consumed 1.19 million tons of natural
rubber, while China's demand was pegged at 1.080 million tons.
For the months of January until mid-November 2002, the U.S.'s
demand totaled 1.045 million, while China's consumption level hit
1.295 million tons.

A senior official of the Shandong-based Triangle Group Co., a
major tire making firm in China, has estimated that by the year
2003 China's rubber demand will reach 1.3 million tons "on back
of the prosperous (local) car making industry."

He added that from the roughly 700,000 tons that China has
imported this year, it can be extrapolated that China's rubber
traders and tire makers can fully utilize the 850,000 tons of
rubber import quota licenses for 2003 that the Chinese government
has issued in October this year.

But Wang Weibo, natural rubber analyst at Qingdao Guoda
Futures, noted that such figures are quite conservative as he put
total rubber demand for 2003 at 2 million tons, and imports at 1
million tons.

Wang, who has just visited numerous tire making factories in
China, said, "consumption and imports next year will definitely
much higher than what the producers have told you... Just look at
their expansion scheme, it's pretty aggressive."