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Outlook on
Natural Rubber Market
Jom Jacob
Senior Economist
ANRPC

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Daily Prices of STR20 and SMR20 (US$/100 kg)
STR 20
SMR 20
29 Dec 2016 Seminar by VRA, Ho Chi Minh City

Observations from Trends
• In both Bangkok and Kuala Lumpur markets,
prices tracked similar paths during 2016.
• There are four major phases in movement of
prices during 2016:
i. Increasing phase from mid-February to end of April
ii. Decreasing phase throughout during May
iii. Stabilization phase from beginning of June to mid-
September.
iv. Recovery from mid-September onwards.
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 3

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Daily Prices of STR 20 and RSS 3 at Bangkok
(US$/100 kg)
RSS 3
STR 20

Premium Price of RSS
• RSS 3 ruled considerably above STR 20 throughout
during 2016.
• Premium enjoyed by RSS 3 considerably went up
at times
– On 22 July 2016, RSS-3 price ruled 62 dollar/100 kg
above STR-20 price.

Does NR Price
Move according to
Demand and Supply?

Global Production and Consumption of NR
(‘000 tonnes)
Production Consumption Surplus (+) or
Deficit in
supply (-)
Growth in
production
(%)
Growth in
consumption
(%)
2011 11,174 11,034 140
2012 11,593 11,046 547 3.7 0.1
2013 12,209 11,370 839 5.3 2.9
2014 12,054 12,137 -83 -1.3 6.7
2015 12,243 12,167 76 1.6 0.2
2016 Likely 12,286 12,600 -314 0.3 3.6
Average growth during 2014-16:
Production 0.2% ; Consumption 3.5%

Favourable Fundamentals
• According to conventional economic theory, price
of a commodity is determined by its demand and
supply (Provided “other things remain same”).
• During the past three year period (2014-2016),
supply grew at 0.2% average annual rate. But,
demand grew faster at 3.5%.

Favourable Fundamentals (Contd.)
• Demand-Supply balance has been favourable to
prices during last three years.
• But, NR prices has stayed almost insensitive to
favourable demand-supply fundamentals during
the past three years. Why?

Why Prices Remained Insensitive to Favourable
Demand-Supply during 2014-2016?
• Effect of low supply from 2014 onwards is partly offset
by the stock accumulated until 2013.
• Mature area substantially expanded from 2013
onwards due to large-scale planting undertaken from
2006 onwards. Therefore, supply has potential to
increase if prices become more attractive. This
psychological barriers prevented NR prices from
moving up.
• Various non-fundamental factors remained
unfavourable to NR, although situation eased from
September 2016 onwards.

Non-Fundamentals Factors Relevant
to NR Market
1. Crude oil trends
2. Currencies of NR-exporting countries
3. Strength of Japanese yen
4. Flow of speculative funds

1. Influence of Crude Oil

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Influence of Crude Oil on TOCOM RSS 3
Brent Crude Oil (US$/barrel)
TOCOM RSS 3 (Yen/kg)
Mid May to end of Sept

Why TOCOM RSS 3 Tracks Oil Trends?
• TOCOM RSS 3 directionally followed crude oil
trends except during the period from mid-May to
end of September.
• In TOCOM, speculative investors are largely
ignorant of technical limitation of substitution
between NR and SR (synthetic rubber).

Why TOCOM RSS 3 Tracks Oil Trends?
(Contd.)
• They perceive that higher oil price can make
petroleum-derived SR more expensive, and lead to
large-scale substitution from SR to NR.
• They bet on possible substitution from SR to NR.
• As a result, uptrends in crude oil market are
expected to increase TOCOM rubber futures.

How Do Oil Trends Reach Physical NR Market?
• TOCOM futures track oil trends due to speculation
on possible substitution between SR and NR.
• Futures markets (TOCOM, Shanghai and SICOM)
act as transmission belts which bring influence of
non-fundamental factors to physical NR market.
• As a result, Physical markets are expected to track
the trends in futures market.

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Influence of TOCOM RSS 3
on Physical STR 20
STR 20 (US$/100 kg)

2. Currencies of Major
NR-Exporting Countries

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Influence of Malaysian Ringgit on SMR 20
US$ in 100 Ringgit
Price of SMR 20 (US$/100kg)
From Sept. onwards

• Till end of August, prices of SMR 20 directionally
tracked strength of Malaysian Ringgit.
• But, from September onwards, SMR 20 did not
follow downtrend in Ringgit.
• Due to more dominant influence of other factors,
NR prices has continued gaining strength despite
the weakening of Ringgit from September 2016.
Influence of Malaysian Ringgit on SMR 20

How does Currency Influence NR Market?
• When Ringgit weakens against US$, exporters
need to exchange less amount of US dollar to
make a Ringgit needed to procure cup-lump from
local market.
• A weak Ringgit makes exporters in Malaysia
competitive in international market.
• It provides them extra space to reduce offer price
of NR in international market. Under such
favourable situation, exporters quote lower price
in US dollar to increase business volume.

3. Influence of Japanese Yen

How Does Yen Influence TOCOM?
• At TOCOM, RSS 3 futures are traded in yen.
• When Yen stays weak against US$, overseas
investors need to spend less amount of US$ to
buy RSS 3 futures. It makes RSS futures
economically more appealing to them and hence
generates higher demand for RSS futures. As a
results, TOCOM RSS futures tend to rise.
• It means, a weak Yen helps rise in TOCOM prices
and a strong Yen works jut the opposite way.

Influence of Yen on TOCOM Futures
• Due to influence of other factors, TOCOM rubber
prices need not always move in accordance with
Yen’s strength.
• The current uptrend in NR prices is helped by Yen’s
sharp depreciation from October 2016.
• This is evident from the graph.

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Influence of Yen on TOCOM Futures
US$ in 100 Yen
From Oct. onwards

4. Influence of Speculative Funds

What are Speculative Funds?
• Due to near-zero interest rates, pension funds and
money with rich individuals in advanced countries
largely rely on fund management firms (Hedge
Funds) to get better returns with minimum risk.
• Hedge Fund industry assets reached US$ 3.2
trillion as of November 2015 (Global Hedge Fund
Report)
• In 2015, US$72.5 billion added by capital inflow.
• Funds shift position among commodities, equities,
US dollar and gold (4 major asset classes).

Gold
US $
9 Dec 2016
Commo
dities
Equities
Hedge
Fund
Manager
Seminar by VRA, Ho Chi Minh City 28

Why Funds Flow to Commodities?
• When conditions turn favourable to commodities,
fund managers switchover funds into
commodities.
• They take decisions based on:
– Economic outlook, US job market data, and
Purchasing Managers’ Index
– Policy changes in US, China, Japan and Europe
– Outcome of OPEC’s major meetings
– Geopolitics.
• While inflow of huge funds takes commodity
prices up, their outflow keeps prices down.

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Monthly Price Indices of
“All Commodities” and “Rubber”
All Commodities
Natural Rubber

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“Metals” and “Rubber”
Natural Rubber
Metals

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“Rice” and “Rubber”
Natural Rubber
Rice

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“Palm Oil” and “Rubber”
Natural Rubber
Palm Oil

NR Follows “Commodity Super Cycles”
• Due to dominant influence of hedge funds,
commodities tend to follow similar trends
regardless of factors specific to each commodity.
• NR prices more or less track the general trends in
all commodities
• Due to major influence of hedge funds through
commodity cycles, demand-supply fundamental
have less important role in determining NR
prices.

Influence of Non-fundamentals
• During 2014-2016, demand grew faster at 3.5%
average annual rate as against 0.2% rate of
growth in supply.
• NR market could not gain strength from near-zero
growth in supply and a faster growth in demand.
• Until mid-September 2016, NR market remained
under grip of more powerful influential of :
– Low commodity prices
– Low crude oil prices, and
– Weak currencies of NR exporting countries.

Medium Term Outlook of NR Market

NR market in medium term is expected to be
determined by:
–Movement of commodity prices in response to
emerging global economic trends, and geo-
politics.
–Emerging developments in crude oil market
–Strength of currencies of major NR-exporting
countries
–Emerging developments in supply and demand
for NR.

Price indices of “All Commodities”
(Base: 2005=100)
Price Index of “All Commodities”
2016 Likely 99
2017 Projected 108
2018 Projected 110
2019 Projected 111
2020 Projected 113
2021 Projected 114

Upward Revision
• Above projections of commodity prices were
released by IMF on 18 August. Commodity outlook
has improved thereafter on account of:
– US economic outlook has improved due to
developments after presidential election.
– OPEC’s meeting on 30 November reached an
agreement to substantially cut oil output.
– Outlook on China’s manufacturing sector improved.
Official manufacturing PMI (Purchasing Managers
Index crossed 50 during November 2016)

Price (US$/barrel)
2015 Actual 50.8
2016 Projected 43.0
2017 Projected 50.6
2018 Projected 53.1
2019 Projected 54.4
2020 Projected 56.3
2021 Projected 57.6

• Crude oil prices projected by IMF on 18 August 2016
are likely to be revised up in view of the OPEC’s
agreement on 30 November to substantially cut
output.
• Brent crude oil is anticipated to average at US$ 52 per
barrel in 2017 (up 21% from 2016), as per forecast
released on 5 December by US Energy Information
Administration.
• It currently rules close to US$ 55 which is beyond
OPEC’s target. OPEC may not allow substantial rise in
oil price due to potential threat from Shale Gas.

• It is impossible to make a reliable judgement on
potential movement of Thai Baht, Indonesian
Rupiah, Malaysian Ringgit and Vietnam Dong.
• Largely depends on Trump’s policy on US dollar
and US Federal Reserve’s approach to policy
interest rate.
– Will Trump choose for a weak US dollar to boost the
country’s exports and to strengthen US economy?
– Will Federal Reserve go for hike in policy interest rates
step by step, to reach 2.0% or 3.0% from the
prevailing near-zero rate?

Anticipated Trends in
Supply and Demand for NR

Consumption
(‘000 tons)
Production
(‘000 tons)
Surplus (+) / Deficit (-)
(‘000 tons)
2017 12,971 13,027 56
2018 13,360 13,685 325
2019 13,761 14,421 660
2020 14,173 14,800 627
2021 14,599 15,163 564
2022 15,037 15,379 342
2023 15,488 15,451 -37

Expectations on NR Market
• NR prices are expected to continue tracking the
general trend in commodities.
• Outlook on commodity prices and crude oil trends
suggest possibility of NR market gaining strength in
medium term, although at low pace.
• Due to more powerful role of non-fundamentals,
demand-supply fundamental is likely to have a less
important role in determining future course of NR
prices.

Expectations on NR Market (Contd.)
• Demand-Supply fundamental is anticipated to stay
favourable to market during 2017. But, can exert
downward pressure on NR prices during the period
from 2018 to 2021.
• Any substantial recovery in NR price can unlock
more supply into market and thereby send negative
sentiments to NR market.
• However, supply-induced negative sentiments are
expected to be offset by more powerful influence
of the emerging favorable non-fundamentals .

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