RUBBER-INTERVENTION (ANALYSIS)
* Producers threaten to intervene to prop up prices
* Stockpiling could be option
* TOCOM recovery may be sustainable in volatile market
By Apornrath Phoonphongphiphat and Lewa Pardomuan
BANGKOK/SINGAPORE, April 13 (Reuters) - A battle of nerves is shaping between rubber growers and speculators as uncertain demand due to the Japan earthquake and Middle East unrest offsets tight supply in a volatile market, but top producers stand ready to intervene if prices plunge. Thailand, Indonesia and Malaysia threatened to take action to prop up prices in March, when tyre grades plunged about a third from a record above $6 a kg after Japan's devastating earthquake amplified fears about a weaker global economy, triggering selling on the Tokyo Commodity Exchange (TOCOM). Prices later bounced on hopes for brief disruptions to Japan's auto production, but any drastic moves by producers, such as export cuts and stockpiling to avoid a repeat of the brutal correction, could slash the income of millions of farmers in Asia and feed unrest in places like southern Thailand.
"Intervention is now the only option to stabilise prices at a time when there is too much speculation on the paper markets," said Vorathep Wongsasuthikul, CEO of Thai Rubber Latex, one of Thailand's top five rubber-exporting firms, which exports around 100,000 tonnes of rubber a year. "Intervention could at least give some psychological impact on the price, and sometime helps support it."
SUPPLY CONSTRAINTS
But with China's move to tame inflation unlikely to affect demand in the world's largest consumer, some argue the market could be best served by relying on its own fundamentals, including supply constraints caused by floods in main producer Thailand triggered by erratic weather and a forecast rise of nearly 5 percent in global demand this year. [ID:nL3E7EB118] Rising open interest on TOCOM rubber futures, which set the tone for physical prices and are closely eyed by dealers, signaling the current rebound could be sustainable. Open interest has jumped more than 20 percent to around 30,000 contracts from a near two-year low in March. <0#JRU>
Yet market nervousness is highlighted by a 7 percent slide over two days this week, tracking other commodities lower after Goldman Sachs told clients to lock in commodity trading profits and fears over the economy revived, coupled with risk aversion after Japan put its nuclear crisis on par with Chernobyl.
Thailand, Indonesia and Malaysia, which together account for about 70 percent of global rubber output, agreed in December 2008 to cut exports and refrain from selling at below $1.35 a kg following a drop of 60 percent in prices -- the toughest action by members of the International Rubber Consortium (IRCo) to date.
The intervention was eventually stopped when rubber prices recovered on strong demand from the tyre industry in main consumer China as well as a gradual recovery in the global economy from the second half of 2009.
"Intervention is required because somehow it instills the confidence in exporters and planters. A volatile market is not something the authority would like to have," said Ker Chung Yang, analyst at Phillip Futures in Singapore. "Firstly, I think export curbs would be something important. At the same time, they would like to ensure that stockpile and the exporting process to be consistent and sustainable."
This year, selling on Tokyo futures subsided after the three countries said they would hold an urgent meeting to discuss ways to support prices. [ID:nSGE72E01W] Frustrated by the wild price swings, the rubber producing nations also demanded explanations in letters sent to executives of both the Tokyo and Shanghai rubber futures exchanges, but got no reply.
"We just want to know what is the reason behind the rises and falls, so that we, as producers, can manage supply appropriately to prevent prices from falling," said Yium Tavarolit, acting chief executive of IRCo.
IRCo stopped short of producing a specific plan if it had to intervene this year.
"We need to sit down and discuss again if prices fall. And if we need to intervene again, the most effective way we could use is to cut exports and production," said Tavarolit.
He did not indicate the price level at which IRCo would intervene. But based on the action in 2008 when prices fell by 60 percent before intervention took place, an indicative level could be $2.56 per kg, traders said.
CONFIDENCE, CHINESE DEMAND Although this year's proposed meeting was scrapped after Tokyo futures regained ground, IRCo warned speculators intervention remained an option.
Still, such action could backfire if real global demand falters and governments have trouble raising funds to buy rubber from farmers in the face of persistent selling pressure from speculators, especially after the advice from long-term commodity bull Goldman Sachs to cut and run. [ID:nN11117735]
The most active rubber contract on TOCOM, September 2011 <JRUc6>, has rebounded more than 40 percent since tumbling to a four-month low at 335 yen a kg in mid-March. The contract struck a record at 535.7 yen a kg in February on rising oil prices before sentiment turned sour on fears the deadly unrest in North Africa and the Middle East could weigh on the global economy. The Tokyo market, which sets the tone for Shanghai rubber futures <0#SNR:>, had shrugged off China's fourth interest rate hike since in six months in early April, a move that had sparked fears of a slowdown in the country's commodities demand. This, together with a run-up in oil prices to 32-month highs, stoked rubber's rebound before this week's fall.
The mood has since soured again on concerns that recent high commodities prices could hit demand.
Although tyre grade prices are still at the mercy of sharp movements in Tokyo futures, some traders say that with the fundamental picture improving, an intervention may not be needed, leaving market dynamics to play out.
"I don't think there will be slower or lower demand because although China wants to reduce approvals for new tyre makers, existing ones are good quality and are well established," said Suharto Honggokusumo, executive director at the Indonesian Rubber Association. "Production is sustainable, and available in the market."
But others feel that if a correction kicks in, the rubber market could be left to its own devices.
"The top three producers should not do anything, the market can work on its own," said a dealer in Kuala Lumpur.
"When you intervene, it distorts the market. When the earthquake and tsunami struck Japan, there was a meltdown in the rubber markets that triggered that statement about possible intervention, but the market has since recovered."
No comments:
Post a Comment