This could leave major consumers such as tire makers with few options other than passing on some of the rising costs to end consumers to maintain profitability.
The market is "likely to stay high into the second quarter of 2011; it would be difficult for prices to come down below $3/kilogram," said Yium Tavarolit, chief secretary of the International Rubber Consortium, a grouping of key producers in Southeast Asia.
Yium had earlier predicted natural rubber would hit $4/kg by the first quarter of 2011, but current prices are already well above that level, as a recent rally in the futures markets took prices on the Tokyo Commodity Exchange to Y383/kg last week, a level not seen since 1980. That was a 280% increase from December 2008 when the market briefly slipped below the Y100/kg-mark amid the global economic downturn.
Prices have come off a bit since then, but many see this as a necessary correction as the market was heavily over-bought. On Tuesday, the benchmark April contract on the Tocom settled Y4.6 or 1.3% higher at Y358.3/kg.
Tocom prices have limited downside from here, as the Y350/kg level is generally acceptable to most buyers, said Kaname Gokon, deputy general manager in Japanese brokerage Okato Shoji Co's research section. The brokerage is one of the top 10 trading members in Tocom rubber, in terms of volumes traded.
By all accounts, both fundamentals and speculative factors are supportive, with forecasts for 2010 prices well above $3/kg.
Underpinning the strength in the market this year is the weather, which has been persistently unfavorable, with the El Nino first and La Nina later, contributing to lower production throughout the year in major producing countries such as Thailand, Indonesia and Malaysia. The three countries together account for about 70% of the global supply.
The supply crunch is unlikely to ease anytime soon as it won't be long before major producing regions enter the dry wintering season around February when trees shed leaves and production falls.
That, coupled with the excess liquidity unleashed by the latest round of quantitative easing measures by the U.S. Federal Reserve, will continue support prices till the second quarter of 2011, added Yium.
Some consumers such as tire companies have already passed on some of the rising costs to end-buyers, as demand for new and replacement tires has been firm, with any softening seen as limited.
There may be little comfort on the supply front even in the medium term as at least 20,000 hectares of Thai plantations have been affected by recent flooding and storms, possibly reducing production further.
As a short-term response, plantation owners have been postponing their replanting programs this year to keep the estates in production while prices remain high, said Thai Rubber Association President Luckchai Kittipol.
"Obviously, the deficit would be greater than anticipated; the recent supply problems were unexpected and have pushed up prices more than expected," said Prachaya Jumpasut, the UK-based Managing director of The Rubber Economist and a former head of Economics and Statistics at the International Rubber Study Group.
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