Supply fears send rubber to record high

Rubber rose to a record high above $5 a kg as tyremakers scrambled to secure supplies amid growing concerns of further shortages.

The raw material used in tyres, condoms and gloves has jumped 25 per cent in two months as heavy rain in the key producing region of southeast Asia has disrupted rubber tapping and flooded roads and plantations.

But analysts believe the rubber market will surge in the first half of the year as production in Thailand, which accounts for a third of global output, enters a seasonal lull.

Jom Jacob, senior economist at the Association of Natural Rubber Producing Countries in Kuala Lumpur, Malaysia, said: “An already severe supply situation is likely to be aggravated further during the period from February to May 2011 coincident with annual leaf-shedding of trees”.

That has pushed rubber consumers to make purchases. Rubber imports by China, the world’s largest consumer, jumped 65 per cent in November from a year earlier, while Indian imports are also rising sharply.

Mr Jacob said demand was likely to gain further momentum in January as consumers stocked up ahead of the Thai winter and that market sentiment was “dominated by uncertainty in the supply”.

Paul Lee, executive director of Sri Trang Group, estimated the industry was holding only a week’s stock of natural rubber. “In the short term we are going through a period of supply constraint and it is going to take 3-5 years to resolve itself,” he said.

The leading tyre companies including Bridgestone, Michelin, Goodyear and Continental are struggling to keep up with rising raw materials costs in spite of raising prices as many as three times in 2010.

Bridgestone, the world’s largest tyre company by market share, said recently it hoped to reduce its rubber consumption by 50 per cent in the long term, while Continental, the German car parts supplier, said it was “working aggressively” to substitute other materials for natural rubber in its tyres.

Herbert Mensching, head of European sales at Continental, which recently announced a 7 per cent increase in commercial tyre prices, said: “For a while now, the extent and speed of the rise [in rubber prices] have already caused us to chase after the actual cost development with our price increases.”

Rising tyre prices will feed through into higher costs for companies, particularly in the mining sector, where booming capital expenditure is increasing demand for truck tyres.

The benchmark rubber price, RSS3 or ribbed smoked sheet 3, was quoted at $5.05 per kg in the physical market on Tuesday, according to the Rubber Research Institute of Thailand. Futures in Tokyo also hit a record in yen terms. The price of natural rubber has quadrupled in two years, earlier this year surpassing the 1952 record when fears about the potential spread of the Korean War triggered panic buying.

The most recent move higher has been driven by the worst floods in decades in Thailand which will reduce fourth quarter output in the world’s largest producer by 33.4 per cent year-on-year, according to the ANRPC.

But booming demand has also played a part. Global light vehicle sales are estimated to have exceeded their pre-crisis peaks in 2010, while purchases of tyres for new trucks in the first 11 months of the year were up 54 per cent in China, 53 per cent in Europe, and 49 per cent in South America, according to Pirelli.

Analysts and industry executives expect rubber prices to remain high, as years of underinvestment in plantations prevent rapid growth in supply.

Kona Haque, agricultural commodities analyst at Macquarie in London, said: “A combination of ageing trees, declining yields, a shortage of labour and rising production costs will prevent producers from quickly making the necessary supply response, regardless of positive prices”.

(Source: http://www.ft.com/cms/s/0/3c6ffb84-1802-11e0-9033-00144feab49a.html)