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."