By Clyde Russell – a Reuters market analys
LAUNCESTON, Australia, Aug 28 (Reuters) – The worst may be over for Asian natural rubber prices as stronger economic growth in China and globally boosts demand for vehicle tyres, but there are still risks to calling for a sustained price rally.
Benchmark rubber prices in Tokyo have rallied 21 percent since the 2013 low in late June and were around 275.6 yen ($2.84) per kilogram in Asian trade on Wednesday.
However, this is still almost 18 percent below the year’s peak, reached in early February, after which prices trended downward amid ample stockpiles in major importers Japan and China, slower economic growth and the end of efforts by top exports Thailand, Malaysia and Indonesia to limit supplies.
The main contract on the Shanghai Futures Exchange has also rallied from its low in early July, gaining 21 percent to trade around 20,730 yuan ($3,387) a tonne.
Similar to the Japanese contract, the Chinese rubber contract is still well off its 2013 high, currently sitting some 26 percent below the February peak.
Rubber prices have been boosted recently by signs of renewed strength in the Chinese economy, with the latest positive indicator being the surprise rise in the flash HSBC Purchasing Managers’ Index (PMI) in August above the 50-level that separates expansion from contraction.
The outlook for the Japanese economy has also been bolstered by Prime Minister Shinzo Abe’s promises to boost growth and his party’s victory in upper house elections last month, which gives him the political ability to see through his planned reforms.
Add to this signs of gradual recovery in the United States and the start of better conditions in Europe and the outlook for vehicle sales, and hence rubber demand for tyres, has improved in recent weeks.
Crucial for rubber demand in China is vehicle sales, which have also been tracking higher, with the first seven months of the year recording a gain of 12 percent in car and other vehicles sales over the same period in 2012.
The growth in vehicle sales so far this year is almost three times the 4.3 percent growth recorded in 2012, boosting demand for rubber.
Higher vehicle sales will also increase rubber demand in future years as tyres tend to wear out after completing around 50,000 kilometres (30,000 miles), meaning each new vehicle will use several sets of tyres during its lifespan.
Despite the brighter outlook for demand for tyres, the major use of natural rubber, Chinese import growth has been slowing, with the year-to-date increase dropping to 13.7 percent in July from 18 percent in June and 32 percent in March.
CHINESE INVENTORIES SURGE
Part of the reason for this is likely the high level of rubber inventories at warehouses monitored by the Shanghai Futures Exchange.
Deliverable stocks rose 1.7 percent to 124,740 tonnes in the week to Aug. 23, taking inventories to their highest level in almost three and a half years.
Stocks have jumped since the second quarter of last year, but much of the gain has come in the last four months, with inventories surging sevenfold from 16,524 tonnes on May 4.
The high level of inventories may act as a brake on further price gains for rubber, as the Chinese have shown that they are prepared to use inventories rather than import if they judge prices to have risen too far, too quickly.
However, stockpiles in Japan have been trending downward, with crude rubber inventories at ports falling to 7,571 tonnes as of Aug. 10, the lowest level in seven months.
This implies that Japanese tyre makers may have to boost imports in coming months, assuming global demand for vehicles does improve.
The contrasting inventory situation in China and Japan doesn’t help when trying to determine the supply-demand balance, but given that the former’s imports exceed the latter’s by a wide margin, more weight should probably be attached to the Chinese stockpiles.
There is also the potential for supply to rise as prices recover, with the Thai government holding 210,000 tonnes of unsmoked rubber sheet as a result of a price intervention scheme between August last year and May this year.
Natural rubber deteriorates over time so the government will be under pressure to sell, which may also cap the current rally.
The Thai government has said it won’t reinstate the scheme to support farmers in the world’s largest producer, causing a protest by about 1,000 farmers on Aug. 26 in the southern province of Nakhon Si Thammarat.
More protests are planned as the rubber farmers demand price support, with their sense of grievance being stoked by the likelihood that Prime Minister Yingluck Shinawatra’s government will extend a more generous scheme for rice producers.
Good weather has also boosted rubber crops in Thailand, and together with the government stockpiles there is plenty of supply available to meet any increasing demand.
It seems that for now rubber futures are gaining on the expectation of better economic times to come, rather than the fundamentals of supply, demand and inventories.
(Editing by Joseph Radford)