The Volatility of the Rubber Market

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Spend Matters welcomes this guest post from Verity Michie, market analyst at Mintec.

In 2016, I spoke about how rubber prices were bouncing back after falling to a seven-year low caused by weak demand. This was true as tight supply and increasing demand saw prices stretch for a year, until the beginning of 2017, where history appears to have repeated itself.

Thai rubber prices have been falling throughout 2017, losing 50% of their value between February and November 2017. So why did this happen after a promising 2016?

The tire industry accounts for 60% of natural rubber consumption, and demand from this industry can be a major driver for rubber prices. U.S. new car sales fell 1.8% year-over-year in 2017, following seven years of growth in the market. U.K. new car sales also fell, down 5.7% y-o-y in 2017, mainly driven by higher taxes after pollution concerns rose surrounding diesel cars, which caused diesel car sales to fall 17.1% y-o-y.

So, should we expect prices to keep falling, lower than the plummet seen at the start of 2016? Or are we likely to see prices recover?

Well, demand from the tire industry is likely to remain low, as U.S. sales are predicted to fall around a further 2% y-o-y in 2018 and U.K. sales are expected to fall between 5% and 7% y-o-y. So we could now assume prices are going to fall?

However, despite this reduced international demand, producers are attempting to tackle the low prices a little closer to home. Thailand, Indonesia and Malaysia, the three largest producers of natural rubber, have made an agreement to reduce exports by 350,000 tons in Q1 2018 — that’s almost one third of global exports. The plans are in place to encourage domestic consumption in other industries, such as construction work. In addition, major producing countries have been required to cut back on production, with Thailand reducing output by over 200,000 tons — that’s 4% of its domestic production.

So what do we expect to see happen in 2018? Although international demand from the tire industry is set to fall, shifting regulation from major producing countries is set to shake up the industry. Falling global supplies will undoubtedly have a knock-on effect to global rubber prices. Prices are unlikely to reach the levels they did at the start of 2017, but we’d expect prices to reach breaking point for some buyers.

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