What is driving record high rubber prices?

BANGKOK, Feb 15 - Rubber futures prices in Tokyo and Shanghai surged to a lifetime high this year and are likely to rise further on speculative buying and seasonal tight supply.

Benchmark rubber on the Tokyo Commodity Exchange <0#JRU:> for July delivery reached a new record high of 522.5 yen per kg on Tuesday. The most-active May rubber contract on Shanghai's exchange hit a record 43,500 yuan per tonne on Feb 9.

Strong futures are boosting physical prices, lifting the benchmark Thai RSS3 contract to a record $6.40 per kg on Monday.

Here are questions and answers on factors likely to influence rubber prices and the market.

WHAT IS HAPPENING WITH DEMAND AND SUPPLY?

Rubber prices began rising sharply in November when floods hit Thailand, the world's biggest rubber producer and exporter, disrupting tapping and destroying plantations.

After the floods receded, Thailand's southern region, which contributes 90 percent of the country's annual rubber production of around 3.2 million tonnes, was hit by unseasonal rains that disrupted tapping in December and January, cutting production.

Rains also affected plantations in Malaysia, the world's third-biggest producer, cutting supply, traders said.

This has coincided with a dry season in Indonesia, the world's second-biggest producer and exporter, further reducing supplies.

Output is likely to fall sharply from the end of February, when the dry season reduces latex output. Rubber trees have already started to shed leaves and are due to stop producing latex completely by March and April, when farmers will stop tapping and supply will probably drop as much as 80 percent.

Demand, however, is strong, especially from China, the world's biggest rubber consumer, due mostly to growth in its auto industries. China auto sales rose 33 percent in 2010, securing its position as the world's top market.

Despite record high offered prices, buying hasn't abated, encouraging producers to quote at even higher prices.

Benchmark Thai RSS3 was offered at the record high of $6.40 per kg.

IS SPECULATIVE BUYING PICKING UP?

Heavy speculative futures buying is also driving up physical prices, say industry officials and analysts, noting the U.S. Federal Reserve's $600 billion bond purchase programme has funneled cheap money into the rubber market, led by investors betting on further price rises who seek to take profits later.

"Funds have been pouring money into several commodities since late 2010, in particular rubber as they saw opportunities to capitalise on high prices at a time that supply is getting lower," said Yium Tavarolit, an economist at the International Rubber Consortium Ltd .

IS THERE HOARDING?

As supplies dwindle ahead of the dry season, local traders and producers have become reluctant to sell. Many want to keep rubber sheet in stock and wait to sell when prices move higher.

"They know that prices will rise eventually in March and April when supplies are due to fall sharply as rubber trees will stop producing latex," said a trader in Hat Yai, a southern Thai city and major rubber centre near the Malaysian border.

(Source: http://asia.news.yahoo.com/rtrs/20110215/tap-asia-rubber-q-a-c3bb44c.html)