The Hindu Business Line : Rubber prices falling despite lean output season

Chennai June 20 Monsoon is a period when prices of natural rubber tend to increase. That is because during the rains production gets affected, as growers cannot tap rubber. But this year, the trend has been reversed.

Rubber prices, which ruled at over Rs 100 a kg towards the end of 2006, are currently hovering around Rs 80 a kg (ribbed smoked sheet grate IV). In the futures market, July contract closed at Rs 80.60 on NMCE and Rs 81.46 on MCX on Wednesday.

Higher stocks

"If prices could be around Rs 100 during peak production season, naturally prices should have been higher now. At least around the same level, not lower by Rs 20," said industry sources. "During November-December last year, RSS IV prices ruled between Rs 102 and Rs 105 a kg. It was despite production being higher and physical stocks also being at their highest in 3-4 years," said Mr N. Radhakrishnan of Cochin Rubber Merchants Association.

"Rubber prices seem to negate market fundamentals. This is what happened towards the end of 2006 and it is happening now also," said industry sources.

"The futures market is responsible for this trend. The futures price seems to be against normal course of the spot market and that is why spot prices currently are ruling lower, especially when monsoon has set it," says Mr Radhakrishnan.

Holding on to stocks

"Growers have been taken in by the futures market. During 2006-end, they refused to bring their produce to market expecting prices to exceed Rs 110 a kg for RSS IV. Now, when rains are setting in and they have problems of storage, growers are trying to desperately offload their stocks," said an official of the Automotive Tyre Manufacturers Association (ATMA).

"What happens is that traders always seek fresh stocks and a result, growers could be left holding old stocks or selling it at a heavy discount," the official said.

"We are not witnessing the way of the rubber world. Lot of rubber dealers have burnt their fingers in the futures market. Many of them have lost heavily. It is one reason why they are not keen on buying rubber," said Prof K.K. Abraham, President of the Pala Rubber Marketing Co-operative Society.

"Why dealers, even growers have lost money. Last December, they were offered Rs 100 a kg including storage charges but they refused to sell. Now, they are being offered Rs 80 only," said the ATMA official.

Reluctant to sell

The growers' reluctance to sell during last December has led to a chain of reaction, including the user industry targeting higher imports this fiscal too (See box).

"Growers were told not to sell by some traders, who took control of the market. Now, they are the worst hit," said Mr Radhakrishnan.

According to him, rubber stocks at the end of May were 1.40 lakh tonnes, more than two months' consumption requirement of the user industry. "Problems for the growers have been compounded by increased imports and dropping exports," Mr Radhakrishnan said. "Our export quality does not match the standards of Thailand. That is why even if our prices are Rs 10 a kg cheaper, there are few takers," he said.

Prof Abraham said his society had exported 2,000 tonnes and sustained loss. "We sold at Rs 85-86 a kg but the prices are definitely better than rates prevailing currently," he said.

Tyre firms' role

Absence of tyre companies in the spot market and carryover stocks from last year's import were depressing the market, Prof Abraham said. "Also, the new generation automotive tyres last longer that not much retreading is taking place," he said.

The ATMA official and Mr Radhakrishnan pointed out at the trend in the Tokyo market, where prices have been heading south during the last fortnight.

"Prices will remain soft and average around Rs 85 a kg this year," said the ATMA official, adding that the tyre makers' body would plead before the N. Rangachari committee to ban futures during the June 26 hearing.

Rubber production during last fiscal has been projected to be around a record 8.5 lakh tonnes against 8.02 lakh tonnes the previous year. Consumption is seen around 8.25 lakh tonnes against 8.01 lakh tonnes.

Import target set at 1-lakh tonnes

Looks like rubber growers are in for a tough time. While physical stocks are at record high, the user industries seem to be in no mood to let them relax.

According to user industry sources, they are targeting to import at least one-lakh tonnes of rubber this fiscal.

"Last year, we imported a record 87,000 tonnes of rubber. This year, we are aiming to import at least one-lakh tonnes. We don't want to face a situation we faced towards the end of last year, when prices ruled above Rs 100 a kg much against market fundamentals," the sources said.

Till now, the user industry has imported 25,000 tonnes, while another 30,000 tonnes are expected to land in the country in two months time.

"Once we complete importing the contracted consignments, we will review the situation," they said.

Prof Abraham said once the current contracts get over, imports would be unviable as global prices are higher.

Last fiscal, tyre manufacturers accounted for 95 per cent of the total import of 87,000 tonnes. The rest was by other rubber goods manufacturers.

With exports slowing down to a trickle, pressure is likely to mount on the growers on the price front, feel analysts.

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