The Thai authorities are having another go at propping up natural rubber prices, but similar to previous attempts, this one is likely to provide only a temporary boost. The government will commence a second round of buying rubber from the market through a 6 billion baht ($184.2 million) buffer fund, Minister of Agriculture and Co-operatives Petipong Pungbun Na Ayudhya told reporters on Wednesday following a cabinet meeting.
This follows a similar amount being drawn in December from a 20 billion baht fund to be used by the state-run Rubber Estate Organisation to support prices. That intervention helped support prices somewhat, with Asian benchmark rubber futures in Tokyo jumping 12.3 percent between the close on December 11 to 214.4 yen ($1.80) per kilogram on January 5.
However, prices then slipped 10 percent to 193 yen per kilogram on January 16, the lowest so far this year. They have since recovered to close at 218.3 yen per kilogram on Wednesday, but this has been driven more by expected tightness in supply as No 2 producer Indonesia enters the drier period, known as wintering, when rubber output declines.
The problem for natural rubber producers is simple, supply has expanded more rapidly than demand, and hasn't been quick enough to leave the market when prices declined. Tokyo futures have recovered slightly from the five-year low reached in October, but are still almost 59 percent below the post-2008 global recession peak reached in February 2011.
The high prices experienced in the recovery from the 2008 recession prompted rising output, with top-ranked Thailand seeing production climbing to 4.17 million in 2013 from 3.78 million tonnes in 2012. It likely declined by about 4 percent last year from 2013, but the point remains that rubber output has risen fairly sharply in recent years, especially when emerging producers in Southeast Asia such as Cambodia are added to the equation.
Thailand, Indonesia and third-ranked Malaysia are planning to meet on February 26 to discuss ways of supporting rubber prices, the Wall Street Journal reported on February 5. The three countries form the International Tripartite Rubber Council, and their efforts to bolster prices in the past have always run into the problem of supplier discipline.
Ultimately low prices may well force more rubber planters to alternative occupations, but it isn't happening at a pace fast enough to provide a sustained lift to prices. Efforts to subsidise farmers further delay the market reaching a supply-demand balance, and probably contribute to prices remaining depressed for extended periods. If supply discipline is difficult to achieve, is there any hope for rubber prices rising on the back of demand?
Structurally, rubber demand in Asia is gaining as more people join the middle class and purchase motor vehicles. Tyres account for about 60 percent of global rubber demand, and vehicle sales in China, the region's top market, remain robust, even if the growth rate has slipped from prior years. China new vehicle sales rose 6.9 percent in 2014, down from 13.9-percent growth in 2013.
On the surface that doesn't seem bullish for rubber, but it's worth remembering that the 2014 sales figures was achieved off a higher base. Also, cars tend to use several sets of tyres over their lifespan, meaning more cars on the road will boost rubber demand in order to meet demand for replacement tyres. However, Chinese rubber stockpiles remain at fairly high levels, with warehouses monitored by he Shanghai Futures Exchange reporting inventories of 168,312 tonnes as of February 13.
While this is down from the record of 207,658 tonnes a year ago, it's still high by historical standards, with inventories now almost 10 times higher than in May 2012. Chinese imports of natural rubber rose 5.6 percent last year from 2013 to 2.61 million tonnes, a growth rate that was less than half the 13.5 percent recorded in 2013.
While China, the world's biggest rubber buyer, will likely continue to record positive growth in imports, the slower pace of economic expansion means demand won't rise nearly as quickly as it has in the past. This means it will take demand longer to catch up to available supply, meaning that the best chance for higher prices is to cut output, a message the main rubber producers appear reluctant to heed.