Presentation at VRA 091216

Outlook on Natural Rubber Market

Jom JacobSenior Economist

ANRPC

Seminar by VRA, Ho Chi Minh City 2

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6100

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190Daily Prices of STR20 and SMR20

(US$/100 kg)

STR 20

SMR 20

9 Dec 2016


Observations from Trends

• In both Bangkok and Kuala Lumpur markets, prices tracked similar paths during 2016.

• There are four major phases in movement of prices during 2016:i. Increasing phase from mid-February to end of Aprilii. Decreasing phase throughout during May iii. Stabilization phase from beginning of June to mid-

September.iv. Recovery from mid-September onwards.

9 Dec 2016


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Daily Prices of STR 20 and RSS 3 at Bangkok (US$/100 kg)

RSS 3

STR 20

9 Dec 2016


Premium Price of RSS• RSS 3 ruled considerably above STR 20 throughout

during 2016.• Premium enjoyed by RSS 3 considerably went up

at times– On 22 July 2016, RSS-3 price ruled 62 dollar/100 kg

above STR-20 price.

9 Dec 2016


Does NR Price Move according to

Demand and Supply?

9 Dec 2016


Global Production and Consumption of NR(‘000 tonnes)

Production

Consumption

Surplus (+) or Deficit in supply (-)

Growth in production

(%)

Growth in consumption

(%)

2011 11,174 11,034 140 2012 11,593 11,046 547 3.7 0.12013 12,209 11,370 839 5.3 2.92014 12,054 12,137 -83 -1.3 6.72015 12,243 12,167 76 1.6 0.2

2016 Likely 12,286 12,600 -314 0.3 3.6

Average growth during 2014-16: Production 0.2% ; Consumption 3.5%

9 Dec 2016


Favourable Fundamentals

• According to conventional economic theory, price of a commodity is determined by its demand and supply (Provided “other things remain same”).

• During the past three year period (2014-2016), supply grew at 0.2% average annual rate. But, demand grew faster at 3.5%.

9 Dec 2016


Favourable Fundamentals (Contd.)

• Demand-Supply balance has been favourable to prices during last three years.

• But, NR prices has stayed almost insensitive to favourable demand-supply fundamentals during the past three years. Why?

9 Dec 2016


Why Prices Remained Insensitive to Favourable Demand-Supply during 2014-2016?

• Effect of low supply from 2014 onwards is partly offset by the stock accumulated until 2013.

• Mature area substantially expanded from 2013 onwards due to large-scale planting undertaken from 2006 onwards. Therefore, supply has potential to increase if prices become more attractive. This psychological barriers prevented NR prices from moving up.

• Various non-fundamental factors remained unfavourable to NR, although situation eased from September 2016 onwards.9 Dec 2016


Non-Fundamentals Factors Relevant to NR Market

1. Crude oil trends2. Currencies of NR-exporting countries3. Strength of Japanese yen4. Flow of speculative funds

9 Dec 2016


1. Influence of Crude Oil

9 Dec 2016


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55Influence of Crude Oil on TOCOM RSS 3Brent Crude Oil (US$/barrel)

TOCOM RSS 3 (Yen/kg)

9 Dec 2016

Mid May to end of Sept


Why TOCOM RSS 3 Tracks Oil Trends?

• TOCOM RSS 3 directionally followed crude oil trends except during the period from mid-May to end of September.

• In TOCOM, speculative investors are largely ignorant of technical limitation of substitution between NR and SR (synthetic rubber).

9 Dec 2016


Why TOCOM RSS 3 Tracks Oil Trends? (Contd.)

• They perceive that higher oil price can make petroleum-derived SR more expensive, and lead to large-scale substitution from SR to NR.

• They bet on possible substitution from SR to NR.• As a result, uptrends in crude oil market are

expected to increase TOCOM rubber futures.

9 Dec 2016


How Do Oil Trends Reach Physical NR Market?

• TOCOM futures track oil trends due to speculation on possible substitution between SR and NR.

• Futures markets (TOCOM, Shanghai and SICOM) act as transmission belts which bring influence of non-fundamental factors to physical NR market.

• As a result, Physical markets are expected to track the trends in futures market.

9 Dec 2016


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Influence of TOCOM RSS 3 on Physical STR 20


STR 20 (US$/100 kg)

9 Dec 2016


2. Currencies of MajorNR-Exporting Countries

9 Dec 2016


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22.0

22.5

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24.0

24.5

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26.5Influence of Malaysian Ringgit on SMR

20

US$ in 100 Ringgit

Price of SMR 20 (US$/100kg)

9 Dec 2016

From Sept. onwards


• Till end of August, prices of SMR 20 directionally tracked strength of Malaysian Ringgit.

• But, from September onwards, SMR 20 did not follow downtrend in Ringgit.

• Due to more dominant influence of other factors, NR prices has continued gaining strength despite the weakening of Ringgit from September 2016.

9 Dec 2016

Influence of Malaysian Ringgit on SMR 20


How does Currency Influence NR Market?

• When Ringgit weakens against US$, exporters need to exchange less amount of US dollar to make a Ringgit needed to procure cup-lump from local market.

• A weak Ringgit makes exporters in Malaysia competitive in international market.

• It provides them extra space to reduce offer price of NR in international market. Under such favourable situation, exporters quote lower price in US dollar to increase business volume.

9 Dec 2016


3. Influence of Japanese Yen

9 Dec 2016


How Does Yen Influence TOCOM?• At TOCOM, RSS 3 futures are traded in yen.• When Yen stays weak against US$, overseas

investors need to spend less amount of US$ to buy RSS 3 futures. It makes RSS futures economically more appealing to them and hence generates higher demand for RSS futures. As a results, TOCOM RSS futures tend to rise.

• It means, a weak Yen helps rise in TOCOM prices and a strong Yen works jut the opposite way.

9 Dec 2016


Influence of Yen on TOCOM Futures

• Due to influence of other factors, TOCOM rubber prices need not always move in accordance with Yen’s strength.

• The current uptrend in NR prices is helped by Yen’s sharp depreciation from October 2016.

• This is evident from the graph.

9 Dec 2016


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8.0

8.5

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10.5Influence of Yen on TOCOM Futures

US$ in 100 Yen


9 Dec 2016

From Oct. onwards


4. Influence of Speculative Funds

9 Dec 2016


What are Speculative Funds?• Due to near-zero interest rates, pension funds and

money with rich individuals in advanced countries largely rely on fund management firms (Hedge Funds) to get better returns with minimum risk.

• Hedge Fund industry assets reached US$ 3.2 trillion as of November 2015 (Global Hedge Fund Report)

• In 2015, US$72.5 billion added by capital inflow. • Funds shift position among commodities, equities,

US dollar and gold (4 major asset classes).9 Dec 2016


Gold

US $

9 Dec 2016

Commodities

EquitiesHedge Fund

Manager


Why Funds Flow to Commodities?• When conditions turn favourable to commodities,

fund managers switchover funds into commodities.• They take decisions based on:– Economic outlook, US job market data, and Purchasing

Managers’ Index– Policy changes in US, China, Japan and Europe– Outcome of OPEC’s major meetings– Geopolitics.

• While inflow of huge funds takes commodity prices up, their outflow keeps prices down.

9 Dec 2016


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Monthly Price Indices of “All Commodities” and “Rubber”

All Commodities

Natural Rubber

9 Dec 2016


Jan-13

Mar-13

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Monthly Price Indices of “Metals” and “Rubber”

Natural Rubber

9 Dec 2016

Metals


Jan-13

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Monthly Price Indices of “Rice” and “Rubber”

Natural Rubber

9 Dec 2016

Rice


Jan-13

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Monthly Price Indices of “Palm Oil” and “Rubber”

Natural Rubber

9 Dec 2016

Palm Oil


NR Follows “Commodity Super Cycles”• Due to dominant influence of hedge funds,

commodities tend to follow similar trends regardless of factors specific to each commodity.

• NR prices more or less track the general trends in all commodities

• Due to major influence of hedge funds through commodity cycles, demand-supply fundamental have less important role in determining NR prices.

9 Dec 2016


Influence of Non-fundamentals

• During 2014-2016, demand grew faster at 3.5% average annual rate as against 0.2% rate of growth in supply.

• NR market could not gain strength from near-zero growth in supply and a faster growth in demand.

• Until mid-September 2016, NR market remained under grip of more powerful influential of :– Low commodity prices– Low crude oil prices, and – Weak currencies of NR exporting countries.

9 Dec 2016


Medium Term Outlook of NR Market

9 Dec 2016


NR market in medium term is expected to be determined by:–Movement of commodity prices in response to

emerging global economic trends, and geo-politics.– Emerging developments in crude oil market– Strength of currencies of major NR-exporting

countries– Emerging developments in supply and demand

for NR.

9 Dec 2016


Price indices of “All Commodities”(Base: 2005=100)

Price Index of “All Commodities”

2016 Likely 99

2017 Projected 108

2018 Projected 110

2019 Projected 111

2020 Projected 113

2021 Projected 1149 Dec 2016


Upward Revision

• Above projections of commodity prices were released by IMF on 18 August. Commodity outlook has improved thereafter on account of:– US economic outlook has improved due to

developments after presidential election. – OPEC’s meeting on 30 November reached an

agreement to substantially cut oil output.– Outlook on China’s manufacturing sector improved.

Official manufacturing PMI (Purchasing Managers Index crossed 50 during November 2016)

9 Dec 2016


Projected Spot Prices of Crude Oil (Average of Brent, WTI and Dubai markets)

Price (US$/barrel)2015 Actual 50.82016 Projected 43.02017 Projected 50.62018 Projected 53.12019 Projected 54.42020 Projected 56.32021 Projected 57.6

9 Dec 2016


Possible Upward Revision of Crude Oil Prices

• Crude oil prices projected by IMF on 18 August 2016 are likely to be revised up in view of the OPEC’s agreement on 30 November to substantially cut output.

• Brent crude oil is anticipated to average at US$ 52 per barrel in 2017 (up 21% from 2016), as per forecast released on 5 December by US Energy Information Administration.

• It currently rules close to US$ 55 which is beyond OPEC’s target. OPEC may not allow substantial rise in oil price due to potential threat from Shale Gas.

9 Dec 2016


Currencies of NR Exporting Countries• It is impossible to make a reliable judgement on

potential movement of Thai Baht, Indonesian Rupiah, Malaysian Ringgit and Vietnam Dong.

• Largely depends on Trump’s policy on US dollar and US Federal Reserve’s approach to policy interest rate.– Will Trump choose for a weak US dollar to boost the

country’s exports and to strengthen US economy?– Will Federal Reserve go for hike in policy interest rates

step by step, to reach 2.0% or 3.0% from the prevailing near-zero rate?

9 Dec 2016


Anticipated Trends in Supply and Demand for NR

9 Dec 2016


Realistic Scenario(Demand grows at 3.0% average annual rate until 2023)

Consumption(‘000 tons)

Production(‘000 tons)

Surplus (+) / Deficit (-)(‘000 tons)

2017 12,971 13,027 56

2018 13,360 13,685 325

2019 13,761 14,421 660

2020 14,173 14,800 627

2021 14,599 15,163 564

2022 15,037 15,379 342

2023 15,488 15,451 -379 Dec 2016


Expectations on NR Market• NR prices are expected to continue tracking the

general trend in commodities.• Outlook on commodity prices and crude oil trends

suggest possibility of NR market gaining strength in medium term, although at low pace.

• Due to more powerful role of non-fundamentals, demand-supply fundamental is likely to have a less important role in determining future course of NR prices.

9 Dec 2016


Expectations on NR Market (Contd.)

• Demand-Supply fundamental is anticipated to stay favourable to market during 2017. But, can exert downward pressure on NR prices during the period from 2018 to 2021.

• Any substantial recovery in NR price can unlock more supply into market and thereby send negative sentiments to NR market.

• However, supply-induced negative sentiments are expected to be offset by more powerful influence of the emerging favorable non-fundamentals .

9 Dec 2016


Thank You9 Dec 2016

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