Fall in line with global trend; futures signal decline

M.R. Subramani

Reasons for fall

Major reason

for fall is shift by user industries from natural rubber to synthetic rubber

Forecast of

a lower GDP growth in the US, Japan and Europe.

Chennai/Kottayam, Sept. 26

Natural rubber prices, which fell below Rs 80 a kg last week, are likely to fall further but may find support in the Rs 70-75 range, according to industry officials.

"The prices have fallen in keeping with the trend in the global market. Tokyo futures have fallen to Rs 78-level and spot prices in Bangkok are ruling at Rs 79," said Mr N. Radhakrishnan of the Cochin Rubber Merchants Association. The prices are for ribbed smoked sheet (RSS) 3, which is the equivalent of RSS 4 in India, which closed at Rs 78 on Tuesday.

Prices could have fallen even lower but for tapping being affected after Onam due to continuous rains. "Tapping has been disturbed on at least eight of the last 10 days due to rains. Despite tapping being affected and tight supply, the prices have fallen," he said.

A tyre industry official said the fall reminded of decline in stock prices. "Hedge funds had invested in rubber futures. They are getting out of it, leading to sharp fall," the official said.

However, a major reason for the fall was the shift by user industries from natural rubber to synthetic rubber. "Tyre industry's use of synthetic rubber has increased seven per cent this fiscal. Non-tyre sector has registered negative growth in rubber consumption," he said.

A rubber industry official said while many small units had closed due to high natural rubber prices, some units had shifted to synthetic rubber. "It is not easy to replace natural rubber but there was no option. If synthetic rubber availability was more, the picture could have been different," he said.

The non-tyre rubber industry has registered a negative growth of 0.05 per cent in natural rubber consumption.

Forecast of a lower GDP growth in countries such as the US, Japan and Europe has also led to fall in rubber prices.

"Actually, fundamentals do not support a fall in rubber prices. Demand and supply are well matched and we are having the lowest ever stocks of 50,000 tonnes in the last 10 years," Mr Radhakrishnan said. "In terms of percentage to the total production, the stocks are the lowest in 25 years," he said.

"It is unique and surprising fall of the prices," he said.

"In the first place, rubber prices should not have increased to such a level," said an industry source.

Tyre industry sources point out to the Malaysian Plantation Industry and Commodities Minister Mr Peter Chin Fah Kui's statement that the rubber growing nations would be happy with a price of $1.70 a kg. "The prices are currently reflecting that statement," the sources said.

Influence of futures

Industry officials point out to the influence of futures, both global and domestic, on the local spot rubber prices. October contracts are ruling at Rs 77.04 a kg, while November and December contracts are ranging at Rs 74.

"People are taking signals from the futures market. They are selling due to that. In fact, some of the traders are selling and then covering," Mr Radhakrishnan said. The tyre industry official said growers were coming forward to sell in view of the falling prices.

Mr Radhakrishnan said rubber prices could fall in the short-term and were expected to range between Rs 72 and Rs 75 a kg even during peak production period that starts in October.

The tyre industry official said the prices could decline and hover around Rs 70-75 a kg.

Domestic physical rubber turned steady on Tuesday. Sellers stayed back following a partial recovery in TOCOM.Spot rates (Rs a kg) were: RSS-4: Rs 78 (Rs 78); RSS-5: Rs 77 (Rs 77); ungraded: Rs 76 (Rs 76); ISNR 20: Rs 76.50 (Rs 76.50) and latex 60 per cent: Rs 61.55 (Rs 61.55).

(This article was published in the Business Line print edition dated September 27, 2006)
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