“Why natural rubber prices are not rebounding?” I have been repeatedly asked this question these days. Here are my perceptions:
- Speculative traders in rubber futures markets are largely staying away due to the negative sentiment caused by a number of factors. The factors include the continuing Covid lockdowns in several parts of China, Russia-Ukraine war and the massive economic sanctions announced on Russia, and the resultant worsening of the global supply-chain disruptions. Manufacturing activities world over are hit by disrupted supply, over-heated inflation and escalated raw material prices. The fear of aggressive interest rate hike by the U.S. Federal Reserve in its forthcoming FOMC meeting makes speculative investments riskier and economically less attractive. Business sentiment is dominated by the VUCA (volatility, uncertainty, complexity, ambiguity) syndrome.
- The various factors mentioned above are impacting on the global economic recovery momentum. Around 75% of the global demand for natural rubber comes from the auto-tire and auto-components manufacturing. Unfortunately, auto sector is one of the key sectors which is worst hit by the continuing supply disruptions. The demand prospects for natural rubber are hit by slowing global economic activity and the disarray in the auto sector. As China accounts for nearly 43% of the global demand for natural rubber, the lockdowns in China, since the end of March, can have a major negative impact on the global demand prospects for this year.
- Global supply of natural rubber is set to improve considerably from the beginning of May as the wintering off-season of supply has ended and farmers resumed tapping in major producing countries (Please see the above chart to get a closer understanding of the seasonal variation in global supply). In China, the domestic production of natural rubber usually returns to normal by the beginning of May every year, after remaining negligibly low for five consecutive months, from December to April.
- Supply-demand fundamental is likely to remain unfavorable to natural rubber until China lifts its massive lockdowns and a ceasefire is reached between Ukraine and Russia. Unfortunately, there is no end in sight for both.
- The prevailing strong US dollar and the weak currencies of the major rubber exporting countries can also weigh on natural rubber prices. A strong dollar gives an extra space for rubber exporters in the Southeast Asia to reduce the offer prices quoted in dollar terms.