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06.02.13 Natural Rubber Review 2012 - What goes up must come down

And up again? These days, and to avoid early blushes, it's better to consider 13 months in any annual review than just the preceding twelve as early-year considerations in an era of austerity and low interest rates usually mean that January has a relatively free run on the upside as Fund Managers and their speculative 'tail' set their forward plans, look around and, as always, home in on commodities as the investment of choice while stock markets still look overdone, regardless of their supposedly attractive P/E ratios.

If there's one thing that 2012 taught the rubber community it was circumspection; that prices are not unidirectional and that rubber doesn't have the divine right to relentless increases in value. It may do Tokyo good to have a closer look at its current drive that, while fuelled by currency, is driven by speculation.

Coming down from an all-time high in early 2011, which completely recovered the damaging losses suffered in the 2008/2009 Sub-prime Mortgage debacle, and while the average price more than halved from those highs by the middle of August of last year, the lowest level reached at that time was still some US$1200-$1300 per ton above the previous lows, which didn’t leave the rubber farmer destitute, just a little less rich against his cost of production.

For the rubber trade in general, across its whole spectrum and in terms of longer-term sustainability, the current, and already partly recovered, values are more conducive to good order than the unacceptable volatility seen over a period going back some four years. Cash-flow considerations are an important element of the supply side, which includes intermediaries and merchants and any squeezing of funding potential for the business can only give rise to uncomfortable anomalies for both growers and processors and a possibly damaging shift in consumer buying practices. Long-term funding for the industry is also threatened when potential investors can't accurately predict the cost of raw material or return on investment due to erratic price swings that double or halve values in no time at all. We have to wonder how many investors on the brink of a decision sometime during 2011 were subsequently and completely sidelined by events towards the end of 2012’s summer; a longer period of calm would certainly be long-term beneficial.

On balance, and ignoring the economic hurdles put up with such monotonous regularity throughout 2012, mostly by a fractious and unsettled European Union, which looked to be under better control until the last few days, Rubber's statistical bodies can't forecast too much of a surplus in the coming years, rather the opposite, so, given a period of relative calm for the industry to repair itself, a steady growth in demand and price should ultimately be possible if not inevitable. Unfortunately, what often looks inevitable in rubber rarely turns out that way.

In terms of raw statistics that need to be tempered by currency movements and comparing the last traded prices of 2011 with their equivalents at the end of 2012, we saw the following for the acknowledged leading chart positions in each market/exchange:

 

　

　

 

2011-2012 Change CNY24320/$3864 CNY26415/$4238 CNY+8.61%/$+9.67%

SHANGHAI:

(CNY/$ 6,2944 6,2323 +0,95%)

TOKYO:

(Yen/$ 77,53 85,92

Y263.2/$3395 Y302.9/$3525 Y+15.08%/$+3,82%-10.82%)

THAI USS3:

THB-4.83%/$-2.04%

SICOM TSR20

-8.04%

SIR20

-8.75%

(Ind Rupiah 9060 9630

-6.29%)

MRE20

-6,94%

WTI CRUDE/bbl

-7.63%

GOLD/oz:

DOW:

12,217 13,104 +7.26%

　

As SICOM is probably the most reliable indicator of rubber fundamentals over a twelve months’ period and a mirror of sentiment for the physical market's SIR values, we use it as the benchmark and see that from end 2011's $3230 and after its annual first quarter extravaganza and a short-lived July lift aside, it moved steadily lower, into a volatile mid-to-end year that was dominated by the will-it-or-won't-it-survive-euro saga as Greece was followed by Spain and latterly Italy on the World Economy's worry list:

　

SICOM TSR20

End 2011 $3230

19Jan ’12 $3670 (up $100 on the day)

25Jan ‘12 $3815 (up $145 on the day)

2Mar ’12 $3825

14May’12 $3290 (down $120 on the day)

1June’12 $3025 (down $122 on the day)

4June '12 $2860 (down $165 on the day)

5June’12 $2795 (down $ 65 on the day)

22June '12 $2745 (down $120 on the day)

5July '12 $2990

8Aug '12 $2595 (down $105 on the day)

14Aug '12 $2410 (down $ 90 on the day)

2Oct '12 $3105 (up $135 on the day)

22Oct '12 $2805

8Nov '12 $2740

28Dec '12 $2970

Given the tumultuous background against which it swung - $352/ton down in just three early-June days - the rubber market had a remarkably small shift end-year to end-year even when single-day movements are taken into account.

Interestingly, we didn't once get the impression throughout the year that either exporters or consumers were unhappy with price levels, even though they could have done without the volatility, as amply illustrated above. If there was concern, it came from Thailand's major political commitment to its farmers, hence the need to pay vociferous lip service to government 'support' programmes, largely unsupported by their immediate neighbours while, despite solid economic growth externally, Indonesian shippers would have been helped domestically by the central bank's apparent return to a creeping rupiah 'devaluation' that keeps exporters ahead of the competition and politically invisible. Consumer buyers, meantime, enjoyed the comfort of being able to buy, after the early excesses, at some way below their budgets, set towards the end of 2011, enabling them to buy forward and to avoid the pitfalls of bunching in the spot market while also competing with China buyers for whom forward buying is still a largely alien concept, although there are recent signs that they’ve also recognized the advantage in distancing themselves from the herd and thin grass. We don't doubt that budgets set in the last quarter of 2012 for 2013 will have been conservatively cautious to afford buyers the same luxury again. It makes sense to dissipate competition.

Statistically, it seems that there may actually be a slight current surplus of rubber, with stocks, mostly in China (and more supposedly under official lock and key in Thailand) freely available if not necessarily fresh or particularly attractive, but the fact that these have been effectively discounted in market price terms by ‘astute management’ – code for manipulation - means that a sudden drop in prices is unlikely. From what we've seen, the decline in values from mid-year 2012 likely forced many processors to cut their cloth, reducing output capacity according to latest demand in order to avoid unmanageable overhangs and cash problems.

Are we economically out of the woods? With the benefit of one month's insight into the New Year, it seems that general economic sentiment is improved if not wholly healed, but it’s worth remembering last year’s early rubber price spike of $600/ton and then hard landing and 2011’s $700/ton rush between the New Year’s turning and February 11th’s peak. Rubber seems to be annually and overly optimistic just after Santa and Rudolf have delivered the parcels and damaged a few chimneys. Nonetheless, had we run this exercise on December 31st last, we might have seen things in slightly greyer tone than today’s in-vogue pink - and that’s in spite of Europe’s latest Hara-Kiri exercise:

* Although the US economy has stalled slightly after the last-minute escape from tumbling over its Fiscal Cliff, investor confidence there is at a two-year high despite most acknowledging that the fiscal battles are still to be fought. Q4 GDP shrank for the first time in three-and-a-half years, but most believe the FED still has rabbits in its hat even though their ears may be shorter than ever.

* Mr Abe's New Japan and Less Expensive Yen are already reaping benefits for corporates; a stronger Japan and a reviving China are certainly bound to excite continued rubber speculation, both markets’ rubber exchanges apparently technically driven at the moment. An equally New China also seems to be recovering its poise and if the ANRPC's latest bulletin is to be believed, its NR imports in 2012 'surged' 18 percent to 3.37m tons. Seems we all missed something there.

* The relief-to-be-alive factor has seen the euro climb to levels that are certainly going to make it even harder for its general economy to improve if exports are to lead it out of the bog and onto dry land again. Spain (GDP still declining) and Italy are the new old sores, both beset by scandal and the thought that in the latter, Bunga-Bunga is not as dead as first imagined; confidence in the Union's seriousness may be very thin. If Greece does readopt the drachma after all it's been through, it's unlikely that either a battle-hardened euro zone or international markets will react as they might have done six months ago. The fact that other central banks around the world are trying to improve export competitiveness for their charges also doesn't bode well for the single currency; notwithstanding the current setback, analysts see it climbing further. A tyre major is closing its largest French plant as the writing appears on its wall: better concentrate elsewhere as the European auto industry drops 23% on the previous year, dividends suspended as its industry declines. It's probably time we ignored Europe as its influence on this particular industry wanes, possibly terminally.

* The US auto industry is going from strength to strength and looks like 2013 will be as good as if not better than 2012's best-in-five-years.

* While some tyre makers exercise extreme caution, others use the current hiatus to invest in what they still see as a rosy future. Any why not? There are still enough people out there with first-time-ownership ambitions and others needing a first tyre change to make things happen.

* Severe or mild, wintering is coming if not already come, its first influence on Vietnam where offers have thinned and prices hardened.

Having said all that, we'll doubtless be proved wrong and right, but both at the wrong time as that's what this is all about: Timing.

　

　

Kind regards – George Sulkowski

　

Today’s markets took a breather. Yesterday’s general equity markets’ battering on re-emerging euro zone upsets saw all of Japan’s commodity exchanges lower today with Shanghai little changed but after briefly testing lower ground below Y330, TOCOM regained its composure to close about $25/ton off, SICOM last quoted at unchanged overnight, the Tyre Majors quiet but still trying to pick off April rubber where bargains were left trailing the earlier, slightly lower market, but in the end paying yesterday’s price. Overall, there’s a calm approaching the Lunar New Year with traders rather than Chinese consumers still active, mostly in SIR, but in low-profile, no doubt encouraged by an improved China January PMI. The yen will continue to determine first if not subsequent daily moves over the next week or two.

$1576.70 $1674.41 +6.18%: $99.41 $91.82 : $3210 $2987 : $148.1/2/lb $135.1/2/lb : $3230 $2970 89.52/$2839 THB85.19/$2781

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