What’s next for rubber – Bearish prices on supply glut or possible overconsumption
- Market oversupplied since August 2022
- 21%-22% drop in prices in H2 compared to H1
- Conflicting market cues makes the outlook uncertain
- Biggest threat - spike in Covid in China when US and EU quiet
Following on from all the global economic turmoil seen in 2022, amid the recent surge in Covid-cases in China, 2023 is likely to present a fresh set of challenges for the rubber market. Amid the bearish demand cues amplified by the expectation of a slow tire market recovery, rubber prices will likely remain bearish in 2023. As a result, rubber production in some of the major producing countries like Indonesia may take a hit.
As of 2021, the cumulative surplus in rubber was estimated to be around 1.6 million tons, resulting in the market being oversupplied for most of 2022. According to the Association of Natural Rubber Producing Countries (ANRPC) data, in November 2022, global rubber production was at 1.426 million tons, while demand was at 1.301 million tons.
Such a trend was reflected in the market intelligence collected by Helixtap. Many market participants echoed the existence of a supply glut and price competition amongst rubber grades to maintain cash flows.
Excess supply or inventory was building in the market consistently from 2013 onward. As a result, the cumulative production surplus peaked in 2020 at 1.8 million tonnes before coming down in 2021 as demand recovered with the easing of the global Covid-19 pandemic. The build-up of excess supply in the market coincided with rubber prices trending downwards simultaneously.
A similar trend was seen in the H2 of 2022 as well. The net rubber production has mostly been at a deficit, only turning into a surplus since August. As a result, the average Helixtap prices for Thai, Indonesian and African rubber saw a 21%-22% drop in H2 compared to H1.
Impact on producers’ margin
Despite the reputation as higher quality rubber, trading dynamics within the rubber market were less favorable for Indonesian rubber. Even as Indonesian factories faced low to negative margins, producers prioritized selling inventories even at losses to keep cash flows consistent. This likely contributed to a lower price for Indonesian rubber and little to no Chinese demand compared to Thai rubber.
The country saw several factory closures due to low demand, high supply, and negative margins. Thus, there is a possibility that Indonesia is likely to fall in domestic production earlier than in other regions.
Helixtap’s trade flow data for September showed an export increase of TSR to China, corresponding with SIR20 being cheaper than STR20 since mid-month. More recently, in mid-November, the Indonesian rubber grade was reported to have diverted cargoes into China, where it traditionally did not see much cargo flows. In September, Indonesian TSR exports increased by 1.8 thousand tons to China, while Thailand saw exports fall by 12.7 thousand tons.
China is not a traditional market for Indonesian, and a shift in the trade flow is indicative of a supply overhang. While the influx of African raw material into Indonesia by some large producers has made Indonesian rubber the cheapest grade on a FOB basis, this has been weeding the smaller players out of the market.
Meanwhile, there are talks of the possibility of Africa banning exports of raw materials in the coming months. If implemented, the raw material cost would spike, which would impact the cost structure for the larger Indonesian producers.
African producers venturing into Asia
As African rubber producers faced low demand from its main markets in the US and EU, prices were adjusted lower to offer into the Asian markets. However, assessed prices hovering around US$1,337.5/mt on CFR basis indicated some reluctance to sell below this level, factoring higher freight costs into Asia.
Against other physical grades, freight costs tend to be higher for African rubber. Hence, FOB prices would need to be significantly lower than other grades for arbitrage buying opportunities. Meanwhile, the seasonal trend for December remained mixed.
Possibility of a drop in production
Owing to continued pressure on margins, the oversupply may ease due to declining margins against the more profitable palm oil. Therefore, an alternative planting asset, such as palm oil, was picked as it is the most economically valuable commodity within the agriculture space, requiring similar resources and skill sets to grow. As per Helixtap analysis, beyond other factors under consideration, the profit margin for rubber vis-a-vis other planting assets is a key factor in determining which asset to grow on a farm.
Inventory level can be game changing
In case of such a shift, it is logical to expect inventories to be drawn down in a period when demand exceeds supply. Interestingly, SHFE inventories have been rising consistently throughout this year until the end of November, when a significant inventory drawdown of 54% was recorded for SHFE rubber warehouses, indicating a possible increase in demand domestically rather than through imports.
The timing for the stock drawdown indicates that preparations for the Chinese New Year have begun and are also reflective of the uptick in Chinese sentiment amid some relaxation in Covid policies. This festive period for 2023 starts earlier than average years at the end of January instead of in February.
Traditionally there is always a positive price sentiment for January, which can be expected in 2023 due to the Chinese New Year holidays at the month end. The Chinese buyers have resumed buying activities amidst more Covid-19 policy easing and weakening the US dollar. However, the recent spike in Covid cases in China has withered the market confidence.
The futures prices are close to the lowest possible denominator - currently, Indonesian grade - and, interestingly, were flat across the curve for most of 2023 at around US$1370-US$1380/mt. This represents a mixed trend and a lack of conviction in the market.
On the one hand, China’s relaxing of the Zero Covid Policy coupled with restocking for Chinese New Year has supported the prices. The bad weather has further amplified the situation in Thailand, and wintering in Indonesia, supporting raw material prices.
However, the overall demand outlook is uncertain for 2023. The weakening US dollar is also impacting exporters in developing countries. “Market looks pretty bad on the demand side now,” said a Singapore-based source earlier this month. Moreover, with the EU deforestation law being finalized and rubber being included, exporters would also need to be warier about the source of their raw materials.