Is speculation fuelling the spike in rubber prices?

Rubber prices have more than doubled in a year, hitting a record Rs180 per kg, leaving consumers, mainly tyre companies, in a quandary. Is there a demand-supply gap or is it financial muscle in the commodities market at play, or perhaps a mix of both?

Graphic by Yogesh Kumar/Mint

Commodity market experts say that the divergence between the spot prices and the near-month prices has doubled to Rs5 a kg—a pointer to higher speculation. The Rubber Board of India says that nearly 250,000 tonnes of rubber stock that has not made its way to the market is available with growers and dealers, the lure of higher prices leading to hoarding.

At the bottom, though, is a demand-supply mismatch. Demand in fiscal 2011 is expected to grow by 20% over the previous year. Meanwhile, truant weather conditions in Kerala, which produces nearly 90% of India’s rubber, have hindered supply from matching demand. Analysts say that the average productivity in rubber plantations is down by 1,000 tonnes a ha.

Then there’s the inverted duty structure, which prevents tyre makers from importing rubber. “We face the anomaly where natural rubber attracts a customs duty of 20%, but finished goods can be imported at 10%,” says

Neeraj Kanwar, chairman, Automotive Tyre Manufacturers’ Association, and managing director, Apollo Tyres Ltd. With buoyant demand, domestic prices of sheet rubber is higher by Rs10-15 per kg than international prices. In the recent past, the latter had been higher by Rs5-8 per kg.

The global shortfall in production adds fuel to this fire. Thailand, the world’s largest producer of natural rubber, claims lower output due to heavy rainfall, which hinders tapping.

On the demand side, vehicle sales have seen high annual growth in China, Japan and other Asian countries. China is estimated to increase rubber imports to 1.7 million tonnes (mt) in 2010 from 1.5 mt last year. These factors point to rubber prices continuing to be high this season. Tyre makers have increased replacement market prices by nearly 9% in the last three months, but still lament the impact on profitability.

Analysts are factoring in a reduction in operating profits of these companies by nearly 2-3 percentage points in the June quarter. “The time lag between increase in rubber prices and the actual price increase in tyres results in lower margins down the line,” points out Ramnath S., director, research, IDFC Securities Ltd.

(mintmoney.livemint.com)