The Inelasticity of Rubber in 2021
Before the inception of automobiles in 1896, rubber was indigenous to Central and South America. It was used for making rubber balls, glues, and sandals. Thereafter it was almost exclusively grown in Asia. Even today 70% of the global supply comes from just three countries– Thailand, Indonesia, and Malaysia.
With its application in the chemical, agriculture, transportation, and aerospace industries, rubber gleans the majority of its demand from the automobile sector that accounts for 75% of its sales. Tires, gaskets, hoses, floor mats, bumpers, airbags, seals on windows, brake pads, and windshields are made from both- natural and synthetic rubber.
Developing countries like China and India which lead the global market for vehicles including three-wheelers and two-wheelers have the world supply chains glued to their sales trend. Another key factor that influences the demand for rubber is the crude oil price. Crude oil is used in the manufacture of synthetic rubber and an increase in its price makes the synthetic rubber dearer. OPEC countries and the US shale segment are its major producers.
From a commodity trading point of view, the value of the US dollar is closely monitored. When its exchange value reduces against other currencies, the sellers are happy to get more dollars for their rubber. The US Federal Reserve Bank regulates its policy to maintain low-interest rates to boost the consumer economy. This creates a favorable market to sell in the US. In fact, 90% of the total worldwide rubber is exported to the US and China. Between the two, China is the largest consumer of natural rubber. In 2019 its total value of natural rubber import was double that of the US.
From a supply perspective, rubber experiences more or less an inelastic supply. Rubber trees require 10-20 years of nurturing before they can be ready for tapping. Often a shortfall is experienced which leads to a rise in prices. This shortfall is intentional at times. The International Tripartite Rubber Council (ITRC) which comprises countries like Thailand, Indonesia, and Malaysia, is known for imposing export curbs to artificially increase the prices.
Japan, too, once controlled many rubber-producing territories. To safeguard against its growing influence, the US formed a Rubber Development Corporation. This initiative led to the development of synthetic rubber using petroleum products. Today Japan is home to the Bridgestone Corporation, which is the second-largest tyre manufacturer in the world.
Currently, the futures on the Tokyo Commodity Exchange are trading around 220 yen per Kg. This is unusual since a low supply is expected this year from Southeast Asia. At present, China, Japan, and Singapore formally trade rubber futures.
In Thailand, a poor harvest is projected by the Thai Rubber Latex Group Plc. until April 2022 owing to the El Nino heavy showers. Thai Hua Rubber Plc, too, expects lower production due to heavy rainfall in the South and the leaf fall disease. All this is expected to drive up the price of rubber. Malaysian research also shows that the Thai and Vietnamese rubber producers stand to gain from the increase in demand for natural latex gloves.
In India, which is the fourth-largest producer of natural rubber, an anti-subsidy duty may be imposed on the import of Styrene Butadiene Rubber from South Korea as it is affecting the domestic industries.
Globally the demand for rubber by type is 40% for natural and 60% for synthetic rubber. By consumption, natural rubber surpassed 12.5 million tons, whereas synthetic rubber reached about 15 million tons. One consultancy, MTG, a leading trade finance consulting company with over three decades of experience in International Banking and Trade Finance Consultancy Services provides flexibility to buyers who strive to get a foothold in this rubber trade.