Natural rubber (NR) prices have been on a sharp decline from the beginning of August 2022. In physical market, the global benchmark grade TSR20 lost 3.9% over the first three weeks of the month, both in Bangkok and Kuala Lumpur. Latex and RSS suffered more severe losses during the same period. As is evident from the following chart, both the futures and physical markets exhibited nearly comparable downtrends during the first three weeks of August 2022.
Looking ahead, will NR prices recover in the short-term? Fundamentally, the price dynamics of a commodity is set by supply-demand balance and NR is no exception. Due to the seasonal pattern of NR supply in major producing countries, the monthly global supply remains considerably higher from August to December every year compared to the months from February to July. This is evident from the following charts which show the seasonal changes in supply from Thailand, Ivory Coast, Vietnam and the world total. The charts show the percentage shares of the 12 months in the total annual supply.
WhatNext has projected the production of NR for the years up to 2030, separate for all the producing countries, based on a scientific analysis of the potential changes in the area under tapping and the average annual yield for each country. On a similar line, the consumption has also been projected for the years from 2022 to 2030, separate for all the consuming countries, based on economic outlook of the respective countries and various historical and structural factors specific to each country. According to the forecasts by the WhatNext on August 21, 2022, the world production in 2022 will be marginally higher than the world consumption (World production: 14.624 million tonnes, World consumption: 14.415 million tonnes). However, due to the seasonal changes in production, the expected monthly production for all the months from August to December 2022 will be considerably above the consumption during the corresponding months. The lopsided monthly demand-supply position anticipated up to December 2022 is evident from the following chart.
Obviously, the anticipated monthly demand-supply position does not support a recovery in the prices until Dec 2022. Moreover, the excess supply over the demand can weigh on the prices and take the market lower further in the subsequent months.
The scenario would be different from the above in the event of demand accelerating, especially the demand from China which comes to 42% of the global. However, possibility is remote for the global demand to accelerate at least till the end of the year. The prevailing overheated inflation and ongoing interest rate hikes by central banks in the developed world suggest that real wages would be on a sharp decline globally. The resultant fall in consumer spending can badly hit economic activities world over. The soaring food prices have left the people with a considerably lower disposable income, compelling them to postpone non-essential purchases. According to the IMF’s World Economic Outlook, released in July 2022, the global economic situation will be turning from bad to worse in the forthcoming quarters. Moreover, 2023 would be worse than 2022. In short, the increasing challenges facing the global economy do not support the possibility of NR demand gaining strength or accelerating in the short-term.
Apart from the unfavourable supply-demand position anticipated up to December 2022, several non-fundamental factors are likely to influence the short-term market sentiment. They include geopolitical tension between China and Taiwan, geopolitical uncertainty arising from the prolonged Russia-Ukraine war, unending Covid-lockdowns in several parts of China, strengthening U.S. dollar, and the continuing weakness in the currencies of major NR-exporting countries.
Summing up, both fundamental and non-fundamental factors are likely to weigh on NR prices, making it practically impossible for the prices to take a U-turn at least up to December 2022.
A scientific assessment should also consider the possibility of predictions going wrong. The emerging scenario, as presented above, can change and the prices can gain, provided the key challenges facing the global economy are significantly eased and investor sentiment is boosted. A full lifting of COVID-restrictions in China, a ceasefire between Russia and Ukraine, a diplomatic solution to China-Taiwan friction, and dovish (Softening) policies by central banks in the developed world, are some of the desirable conditions for cheering-up the market sentiment at least to a limited extent. As of now, the priority of central banks in the developed world is to curb the prevailing four-decades high inflation. As such, the central banks in the developed world are unlikely to shift to dovish policies until inflation starts cooling-off. A massive policy stimulus by China can also boost investor confidence. China has sounded the government’s priority to bring the economy, particularly the shattered property sector, back to sustained growth track and the central bank cut its lending rates. However, there is no indication of China launching a massive stimulus package for its economy.