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June 04, 2014 02:00 AM

Analyst says rubber glut could continue for two years

Supunnabul Suwannak,
Bloomberg News Service
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    LONDON—A sixth year of global surplus may depress rubber prices through 2016 as maturing trees boost production and slowing growth reduces demand in China, the biggest consumer, according to an industry adviser.

    Supply will outpace demand by 316,000 metric tons in 2016, compared with 483,000 tons in 2015, according to London-based The Rubber Economist. The adviser increased its forecast for this year's glut by 78 percent in March as output in Thailand, the largest grower and exporter, surpassed predictions. The International Rubber Study Group also raised its estimate saying production will increase as trees planted between 2006 and 2008 mature.

    Futures in Tokyo, the global benchmark contract, have tumbled 26 percent this year, touching a four-year low in April. Lower prices may boost earnings at tire makers including Pirelli & C. SpA and Bridgestone Corp., while squeezing profits for small farmers who account for about 80 percent of world supply. China's economy is forecast to grow 7.3 percent this year, the weakest pace since 1990, based on the median estimate in a Bloomberg survey.

    “The natural rubber market may remain in surplus until 2016,” Prachaya Jumpasut, managing director of The Rubber Economist, said in an e-mailed response to questions from Bloomberg. “Prices may remain bearish until then, unless demand picks up faster than I anticipate in China and other major consuming countries.”

    China reserves

    Inventories in Qingdao, China's main rubber-trading hub, reached a record 270,000 tons as of May 16, according to Qingdao International Rubber Exchange Market. Imports may expand 10.7 percent this year to 4.26 million tons, slowing from last year's growth of 14.3 percent, the Association of Natural Rubber Producing Countries said this month.

    “We're in a period of, I would say, instability in the industry,” Stephen Evans, secretary-general of IRSG, the Singapore-based inter-governmental group, told a conference yesterday in Singapore. “It'll probably last for another year or two until we see a shift in global economic performance.”

    While a looming El Nino may not be enough to reduce the glut, the weather event that brings drought to the Asia-Pacific region might curb the decline in prices, according to Prachaya. The El Nino during 1997-98 slowed production growth to 0.4 percent in 1997 from 6 percent in 1996, he said. There's no evidence of any impact during occurrences in 1982-83 and 1987-88, according to Prachaya.

    El Nino

    “The impact of drought and El Nino on production will not be enough to counter the current large and rising amount of natural rubber surplus,” Prachaya said. “But it may help to slow down the declining price trend.”

    Futures rose as much as 1.3 percent today on speculation that Thailand's plan to reduce state stockpiles of 200,000 tons could be delayed after the military imposed martial law.

    Global demand in 2014 may grow close to the IRSG's lowest estimate of 4 percent, said Lekshmi Nair, its senior economist.

    “What might support rubber prices is, obviously, increased demand,” Evans said. “What is stopping everybody getting excited about the possibility of the U.S. and European recovery is that China is apparently slowing down.”

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