Market Forces

Rubber Falls to Four-Year Low on Fears of Oversupply, China Slowdown
Southeast Asian Cartel Refrains From Cutting Supply

By HUILENG TAN, Wall Street Journal
Updated April 24, 2014 12:10 p.m. ET
Rubber prices are feeling the effects of oversupply and slowing growth in China. Above,aworker at a rubber plantation in Thailand last year pours raw latex into molds. Bloomberg News
The price of rubber has tanked to the lowest level in more than four years, a selloff that has accelerated in recent days as the Southeast Asian cartel that controls the majority of production has refrained from acting to support the market.

The commodity, used to make items from tires to latex gloves, is a politically charged crop, and the market is prone to government intervention to support prices. Price declines in the past have sparked widespread protests by farmers in Thailand.

The rubber market—valued at more than $30 billion a year—is suffering as a result of concern about oversupply and slowing growth in China, the world's biggest importer and buyer. At their low point this week, in after-hours trading on Monday, rubber prices in Tokyo were down 30% from the start of this year and down 5% from Friday's close. Benchmark futures on the Tokyo Commodity Exchange closed Thursday at ¥203.6 per kilogram.

But this time, the International Rubber Consortium, the cartel that accounts for more than two-thirds of global output, is staying out of the action.

The group, which comprises Thailand, Indonesia and Malaysia, the major producing countries, hasn't issued any formal statements about the situation, although IRCo Chief Executive Officer Yium Tavarolit told The Wall Street Journal Thursday that the group has discussed the selloff and is "monitoring the situation closely."

It will consider action "if and when necessary," Mr. Yium said.

On Monday, Mr. Yium said "macroeconomic uncertainty" underpinned the decline, and that member countries were urging producers to manage output and sales in the current market.

The group's stance is less aggressive than in February, when the cartel publicly urged members not to sell the commodity to help stem a plunge that reduced prices by more than 7% in the first 10 days of the month. Even that didn't stop prices from extending their slide.

The cartel also pushed for a cut in exports in August 2012, when prices had fallen to a three-year low, prompting Thailand, Malaysia and Indonesia to reduce sales for six months. The move boosted prices, though the market slipped back early in 2013.

Over the past two years, Thailand has introduced price-support measures for rubber, which have included buying the commodity at above-market prices, but no more purchases are expected. The strategy helped absorb burgeoning supplies from new producers like Vietnam, which has overtaken Malaysia as the world's third-largest producer of the commodity.

"It's unlikely that the three countries will buy rubber now to support the market because it is the low-production season, so there isn't very much to buy or to export," said Ryuta Imazeki, Tokyo-based analyst at Okachi & Co., one of the top rubber brokers by volume on the Tokyo Commodity Exchange. Mr. Imazeki also said the decline in prices early in the week triggered additional orders to sell, which sent prices to multiyear lows.

The Singapore-based International Rubber Study Group predicts a production surplus of 428,000 tons this year, a forecast that is also weighing on the market. Stockpiles in major consuming countries like China and Japan are already high.

"Given the extremely poor market sentiment, I don't think anything the three countries say right now will make a difference," said Chiaki Furui, chief executive of Agrow Enterprise, a Bangkok-based commodities brokerage.

Still, China is continuing to buy. Trade figures show the region's biggest economy and world's largest consumer of natural rubber imported more last month. Imports of natural rubber rose 15.6% from a year ago to 270,571 metric tons, suggesting that buyers are taking advantage of the slump in prices to build up stockpiles.

"Supply is very tight right now in producing regions as it is the low-production season," said Mr. Yium, who also noted that weather forecasters see an increasing likelihood of an El Niño weather pattern this year. In Asia, El Niño typically brings drier weather, and prices tend to rise in the dry season from March to May, when the output of latex from trees slows to a trickle.

Write to Huileng Tan at huileng.tan@wsj.com

I wonder what implications this will have for fetish latex? Probably not much, though it's interesting to see how a natural product like latex is a victim of global market supply and demand forces as much as any other commodity.