TOKYO -- Speculative trading has caused China's natural rubber inventory to yo-yo, depriving rubber farmers and distributors across the globe of a yardstick for making decisions on their production and procurement activities. Such trading appears to be on the decline for now, but this is only accelerating the already rapid decline in stockpiles.
China's rubber inventory increased from last autumn through the beginning of this year on expectations of growing domestic demand for car tires and other rubber products. Since then, however, importers and exporters have been reducing the volume of their procurements, as they are betting the commodity will continue to trade at low levels for some time to come.
Out of balance
Rubber produced by farmers in Thailand and Malaysia and imported to China by distributors is held at warehouses designated by the Shanghai Futures Exchange before being delivered to buyers. The volume of the inventory at these warehouses is a key gauge of the supply-demand balance in China, which consumes one-third of the world's natural rubber.
In 2013, that inventory was around 100,000 tons in the January-September period, but it started surging in around October. The volume roughly doubled to about 200,000 tons in February. Imports from Thailand and other countries rapidly increased on hopes for a further rise in Chinese rubber consumption, said a sales representative at a Japanese rubber trading house. Ribbed Smoked Sheet (RSS) No. 3 listed on the Tokyo Commodity Exchange (Tocom) fell to the 220 yen ($2.13) level per kilogram in February, down from the 270 yen level logged at the end of last year.
This was largely due to distributors stocking up on rubber while the price was low with an eye toward selling it to tire manufacturers and other buyers when the price rose.
But China's inventory suddenly began shrinking in spring, falling by nearly 10,000 tons a month to reach 150,000 tons or so in July. Tocom's international rubber price index was moving below 220 yen per kilogram, after briefly falling under the 200 yen line in June. And yet, Chinese rubber imports have been struggling to gain momentum.
On the bright side, low rubber prices may mean strong earnings for tire makers worldwide. Japanese tire maker Bridgestone said on Aug. 8 that its group net profit for the year ending December 2014 is expected to 293 billion yen, jump 45% on the year to top its record high for the second straight year.
Smaller appetite
In China, rubber demand grew only slightly. According to the China Association of Automobile Manufacturers, sales of new automobiles, which support tire demand in the country, were 11.6 million units for the six months through June, up 8.4% on the year. The growth was slower than the double-digit increase in 2013.
The question is why China's rubber inventory saw a sharp decline even though growth in demand slowed. Shinichi Kato, president and CEO at Shinichi Kato Office, a Tokyo-based consultancy firm specializing in rubber and other materials, said distributors have been making inventory adjustments because the slump in rubber prices is highly likely to continue for a long period. In Kato's view, Chinese distributors have been reducing imports and selling rubber in inventory on doubts over the market's ability to absorb the supply.
Another speculation is that the decline is related to Chinese authorities' discovery in June that a resource company had pledged the same copper in the bonded area at the port of Qingdao, in east China, as collateral for multiple loans. In recent years, many Chinese companies have profited off investments through the use of money raised by importing commodities with no intention of using them. Kato noted that distributors might fear coming under the authorities' microscope if they have excessive inventory.
China's rubber inventory has grown slightly since July, in line with the production increases in rubber-producing countries. Rubber prices, however, remain largely flat. Naohiro Niimura, representative director of Market Risk Advisory, said natural rubber will rebound toward the end of this year but the top side will be limited. This is the prevailing view among market insiders.
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