Past and future of the rubber price

Guys,
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.

This is very comprehensive article. Thanks.
Just see how the thinking of both of us. I thought of putting a same kind of article yesterday and today morning i completed it and published.

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Once again we both targetting REXP. Good luck.

Mean time i have few issues here. Just see...

01.

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 up. wrote:

- This should be other way round no? When the crude oil prices going down prices of sythetic rubber gets cheaper. However the production cost of the natural rubber remain same.

02.

12) What is the price of natural and synthetic rubber as of OCT/2014? wrote:

As I mentioned earlier this should be other way round no?

03.

3) Why rubber price reach its bottom every 5-7 years? wrote:

- Yes not only this factor. When crude oil prices going down it directly affects the NR prices as mentioned above. Hence to me the major factor to the down fall of the NR mkt is the down turn of the world crude oil prices. Same time if crude oil starts to go up this may take a u turn. But it won't happen in near future.

Thanks for publishing such a good article here. what this forum is laking now is good quality articles like this and nobody wanted to participated to good threads as well.

01.https://forum.lankaninvestor.com/t2543-its-going-down-and-down-its-going-up-and-up#17743 - still only one comment to this.

02.https://forum.lankaninvestor.com/t2548-hot-stock-for-the-future#17758 - not a single comment up to now for a such a valuable counter.

+ rep from me for the time taken to publish this one on behalf of us.

Good one. + rep.

One thing: we should also keep track of oil prices. We know Natural Rubber prices and Oil prices have some connection.

Don't think oil prices will stay low till 2020.

thank you

Rubber prices should be dropping....

Thanks very good article.

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BIG thanks for Jana 1,

hearing everywhere crude oil & rubber connected stories I was so long awaited to find it out, but however couldn't find time.
and this your article not only saved my time also fueled me to find time to study this more.

above I attached a chart which compare crude oil price vs rubber price with the detail freely available in the net. now it may not properly clear due it's size but why I stretch so much is to have a clear look over the trend. FI
X= months for 30yrs
Y= price in US$
red line=rubber price
blue line=crude oil price

now as I see there is a good connection of rubber price with the crude oil price though jana 1 said it's minimum. isn't it?

1 more thing what's TOCOM ?is it tokyo commodity exchange?

dear Jana 1 I want to inform you there are many silent readers like us not only because they all don't care what you post but we may not have enough time/thorough knowledge to match you guys. but please keep your good works up as it'd benefit lot of people.

Excellent article on rubber prices

But most of plantation companies have other crops such as tea, oil farm,coconut,export crops ect

Percentage of rubber components is very law

This will effect Plantation companies such as Kegalle which has 55% Ruber

still KGAL is trading at a higher price thanks to low liquidity in the mkt.

Thx both Jana1 & SH,

Learnt lot correlation of rubber & oil from this thread.

As "yaka" said, sometimes we are silent readers as limited time (most of time I'm reading while travelling), limited knowledge ...etc. But we grateful to you guys for your time & thinking to share your knowledge with us. Big thx.

Good luck.

Excellent Jana1,thanks a lot
+ rep

Here we had a sort of comparison in below thread,
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here is the link I found these data.
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REXP SEPQ 2014 Results will be more interesting to see.

A very informative and useful one. The way you presented also very good. Thanks and + from me.

Admins,

If possible please merge the two articles (Jana1 and Stock-hunter). Then the discussion of this topic will be in the same thread.

@ stocks hunter

It will be miss-leading to follow international rubber prices for a Sri Lankan manufacturing entity.

According to the chart published by stocks hunter, world rubber prices have dropped by close to 40% during this year. But has it happened in local rubber prices?

Local rubber prices were flat through out this period and remains close to 2 USD/Kg. I expect local rubber prices to remain around 2.3 - 2.5 USD/Kg in short term, a slight increase from current prices.

stocks hunter wrote:REXP SEPQ 2014 Results will be more interesting to see.

I expect around Rs 9-10 for Sep qtr. my judgement based on past rubber price and its Sep qtr performance.

hariesha wrote:@ stocks hunter

It will be miss-leading to follow international rubber prices for a Sri Lankan manufacturing entity.

According to the chart published by stocks hunter, world rubber prices have dropped by close to 40% during this year. But has it happened in local rubber prices?

Local rubber prices were flat through out this period and remains close to 2 USD/Kg. I expect local rubber prices to remain around 2.3 - 2.5 USD/Kg in short term, a slight increase from current prices.

No hariesha. Local rubber price simply influenced by the international price. But in short term there are irregularities. When compare two rubbers same great of rubbers need to compared. I guess SH chart rubber great is different.

Now our local rubber can collapse extremely as small holders get 300rs/. Kg guaranteed price. They will not worry about lost anymore. Just they will sell what ever the mkt price. Plantation companies will be in hell. For small holders production cost is 195/kg but plantation companies it is around 250/kg.

Jana1 wrote:

stocks hunter wrote:REXP SEPQ 2014 Results will be more interesting to see.

I expect around Rs 9-10 for Sep qtr. my judgement based on past rubber price and its Sep qtr performance.

@ Jana 1,

Is it only the rubber price matters for REXP performances?? What if the demand decline in Europe? What are the limitations for REXP??

Jana1, do you know the percentages of local consumption vs exports of NR. I read awhile back that with the rise of Loadstar, Dipped and Tyre, the local consumption has gone up considerably. I also think that there are more NR consuming projects in the pipeline.

Leon wrote:

Jana1 wrote:

stocks hunter wrote:REXP SEPQ 2014 Results will be more interesting to see.

I expect around Rs 9-10 for Sep qtr. my judgement based on past rubber price and its Sep qtr performance.

@ Jana 1,

Is it only the rubber price matters for REXP performances?? What if the demand decline in Europe? What are the limitations for REXP??

Yes rubber price is the main component of their cost of sales. Its fluctuation highly affect its GP. When rubber price drop the Turnover remains flat while GP reduces significantly.
Flat exchange rate is another positive factor since they import hard rubber as raw material. I hope the exchange rate will not fluctuate much for few years.

Always entrance of competitors is another factor which will take another 3-4 years to establish.

There are few good things around REXP, good waste management, improved efficiency, establishing new markets. These factors they underlined in financial statement.

Chairman said following statement in 2014 financial statement which answer ur question.

"The Company remains optimistic that the sales volumes to European markets
will increase with the full recovery of European economies. To
further enhance growth in sales volume and margins new stable
mats were introduced to Australian & New Zealand markets,
and development of super soft anti-fatigue mats, soft cow mats
are also in progress to cater the industrial & agricultural sectors.
Improvements to energy efficiency have further strengthened its
position."

Backstage wrote:Jana1, do you know the percentages of local consumption vs exports of NR. I read awhile back that with the rise of Loadstar, Dipped and Tyre, the local consumption has gone up considerably. I also think that there are more NR consuming projects in the pipeline.

In 2013, 24 000 M.T raw natural rubber exported and 107,000 MT was local consumed. I don't know about the pipeline, they always talk about it. Even local consumption is gone up considerably, what is the impact in the rubber price? It will adjust with world mkt since our export revenue is almost 50% of local consumption of the finished products.

In 2010, 101bn local consumption versus  63 bn foreign. But in 2013 it was 105 bn local consumption versus 92bn foreign sales. Foreign revenue increases over time.

DIPD is actually doing non-medical gloves which make nearly 13bn rubber related products turnover. Only 0.5% of the 13bn product was sold in Sri Lanka. It has good portion of 92 bn total foreign rubber export.

If we come to tyre 25 % of the 5.8 bn TO is foreign sales. TYRE doesn't have much impact as its TO is just tine portion and it cant influence on local rubber price at all.

In case of REXP, 2.2 bn export versus 0.25 bn local. Most of Sri Lanka rubber related producing companies mainly target foreign mkts. So local rubber price should much with foreign to make sri lanka rubber product so competitive. Sri lankan government aware about the mechanism.