It has been so long since I updated my last article.
I was thinking start up this topic so long ago but never had time to finish it off. When I came to CSE a decade ago I had no idea when people were talking about crude oil price drop and rubber price drop. I had no idea when I searched information regarding how rubber price behave and what impact crude oil price has on rubber price a decade ago. I believe this topic to be useful for newcomers to enhance their knowledge. Most of these findings are from the documents that I gathered for decades. For ease of reading I put in a question and answer manner. If u have any questions please comment below.
1) How rubber price behaved over century?
See below figure.1900 price was considered as 100. So in 2014 its price is 0.2 time of its 1900 price. The reason for falling rubber price is discussed below in other questions.
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2) As rubber price reached its peak in 2011, now it is going through bear market. When rubber price will move up?
It will move up by 2020. Probably bottom out in 2016-2018. Look carefully how it behaves in the mkt during this time period. The issue with rubber mkt is, if they fall then it falls for ages. See attached article where Prof.Smith who has predicted past price fluctuation very well again predicted this bear mkt end near 2020. I also believe his prediction is right. Read below article in the link.
Go to Page-53 of the below link.
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These are the predictions he had made in July 2011 and Nov 2012. You have to remember March 2011 rubber reached its peak of Rs650/kg. This guy predicted its drop at that time when rubber was Rs500/kg. So his prediction of $2/kg seems to be broken. I guess it will come further down becz the real bear is in 2016-2018.
3) Why rubber price reach its bottom every 5-7 years?
The below figure simply depict the situation. The rubber tree takes 6-7 years’ time to yield rubber. When rubber price reach its peak price every1 cultivate rubber hence over supply come eventually rubber price collapse. The real bottom will come approximately 6 years after the excess cultivation.
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4) In what mechanism rubber price fluctuate?
Basic demand and supply determine the price. Rubber tree has 6 years growing period to produce natural rubber. So over cultivation of 2011 would hammer the price of natural rubber until 2018. See below figure for new cultivation until 2011 (Two lines in the figure shows the prediction made in 2011 and 2012). Becz rubber price was peak in 2011, so everyone has started cultivating more eventually it caused over production with 6 years’ time lack.
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5) What is the history of natural rubber (NR)?
• Found in 1500, but cultivated by 1770 in South America.
• It was first used as rubber cubes.
• In 1875 - Henry Wickhem successfully gathered 70,000 seeds of Hevea brasiliensis in the Amazon region and shipped them back to Britain to germinate in the Royal Botanical Gardens .
• In 1876-about 2000 seedlings were shipped to Sri Lanka, 22 to Singapore. This is the first time outside Britain. Areas : Rubber cultivation takes the first place in Kalutara and the Ratnapura district areas.
• In 1898 – Established rubber plantation in Malaysia.
6) What is the impact of Synthetic rubber (SR) on Natural rubber (NR)price?
When I was young to the mkt people were talking crude oil price would affect the rubber plantation profit. I had no idea by that time. Later I found the mechanism is simple. Synthetic rubber is the substitute for the natural rubber which has to be extracted from crude oil. See below figure for how synthetic rubber came to mkt and got its share. Now it remains around 50-55%
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7) What is rubber yield and how affect the price?
Rubber yield is a measure how many metric tons of rubber can be extracted from 1ha of rubber plant. See below table for yield in 1990. We were very poor compare to other competitors in 1990. Now the yield is around 1400 mts/ha. Lower yield cause higher production cost.
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8 ) What are the other rubber producing nations?
Below table show other countries. Till 1990, Malaysia was a largest producer but with economic crisis they moved to palm oil.
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9) Why natural rubber price decline?
The simple reason is technology development. With technology more substitute came to market, for example synthetic rubber is a major competitor for natural rubber. In 1970, 35kg of natural rubber was consumed by one automobile which is reduced to 22 kg per vehicle in 2005.
10) What is the % of rubber is consumed bu tyre industry?
60% of the rubber is supplied to the tyre industries.
11) Can synthetic rubber be used for all needs while completely disregard the natural rubber?
No. Natural rubber is preferred for certain applications, such as aircraft tires, for its ability to
handle a wide temperature range. Synthetic rubber’s resistance to oils and chemicals is preferred for other applications, such as petroleum hoses. When technical performance parameters are marginal, price and other supply factors determine selection. See below figure for usage in different countries.
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12) What is the price of natural and synthetic rubber as of OCT/2014?
Synthetic rubber- 2735 Us$/tons
Natural rubber- 1823 Us $/tons
13) Why synthetic rubber price has demand even at higher price compared to Natural rubber?
This is all about one nation which is going to be the king in future- that is China. In 2012, the consumption volume of natural rubber in China accounted for over 1/3 of the global consumption volume with foreign dependence degree exceeding 80%. Since 2001, China has become the largest importer of natural rubber in the world. Natural rubber resource is insufficient in China, which provides market opportunities for developing synthetic rubber industry. In China, the synthetic rubber demand of its downstream industries is strong, so synthetic rubber industry develops at high speed. Synthetic rubber can be easily manipulated and can be used for variety of products. The synthetic rubber in China showed exponential growth.
14) Does synthetic rubber made of petroleum? Else what are components of synthetic rubber?
No. It is made of coal, petroleum and natural gas, so its price is closely related to prices of the three major raw materials.
15) Who is going to get maximum benefit in cse in near future?
The one who manufacture rubber end product and has no plantation under its wing will benefit. So REXP is going to get benefit till 2016. If rubber price drop another 30- 50%, REXP will make annual EPS of 40. I guess they are going to make it sooner.
Hope few value investors will make use of it.
Thanks
Jana1
PS: Admin pls leave this article under mkt chit chat.
Last edited by Jana1 on Sun Nov 02, 2014 7:40 am; edited 1 time in total
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