Dip in rubber futures won't grow into a correction

A slip in rubber futures, which extended to 12% their tumble from last week's record high, does not herald a correction, as strong growth in Chinese and Indian car sales erodes stocks further this year.

Commerzbank analysts forecast rubber prices will "likely remain at a high level", noting that 2011 looked set to be the fourth year in the last five in which demand for the tyre ingredient will exceed production.

At Phillip Futures in Singapore, Ker Chung Yang said a fall in Tokyo's benchmark August rubber contract, which fell to a three-week low of 473.00 yen a kilogramme in Thursday's afternoon session, was viewed as "healthy" in the market, given that the commodity had been technically overbought.

"Since fundamentals have not changed much with major producer Thailand in the wintering season, Tokyo rubber may retest 500 yen a kilo again," Mr Ker said.

The fall in rubber futures also appeared to contradict usual market logic in which prices move in line with oil, the raw material for synthetic alternatives.

However, high oil prices, which for Brent crude topped $117 a barrel on Middle East unrest, could also dent the demand for cars which has driven rubber's rally of more than 60% over the last six months.

Supply gap

Indeed, Commerzbank's assessment was based on estimates from the International Rubber Study Group that demand will rise by 4.6% to 11.2m tonnes this year, as demand for vehicles soars among Asia's enriched consumers.

Chinese carmakers expect sales growth of 10-15% in domestic sales this year, with Indian peers forecasting a 23% rise their production.

Rubber consumption in these countries will grow by 9% and 5.2% respectively, the Association of Natural Rubber Producing Countries believes.

Meanwhile, the association believes that output among its members, which account for the great majority of world production, will rise by 4.8% to a little under 10m tonnes, held back by heavy rains brought by the La Nina weather pattern.

The supply squeeze is being exacerbated at the moment by the entry of Thailand, the top producer, into a seasonal downturn, which last under April, when rubber trees shed their leaves and latex volumes fall to half peak levels.

"No news which would ease the situation is evident on the supply side, at least for the moment," Commerzbank said.

'Significant margin pressure'

The comments will lower hopes for tyremakers of a relief from the rise in raw material costs which Goodyear blamed for driving it into a fourth-quarter loss.

French rival Michelin two weeks ago said that rising rubber costs would have a E1.5bn impact on operating income by this year, although it expected to recoup most of this through higher product prices.

Nonetheless, Fitch Ratings, in a report earlier this week, warned that tyremakers faced "significant margin pressure".

"Even after factoring in limited substitution of synthetic rubber in the tyre-making process, further tyre price increases appear necessary in 2011," Fitch analysts said.

(Source: http://www.agrimoney.com/news/dip-in-rubber-futures-wont-grow-into-a-correction--2860.html)