1. IRE
2017
32 | Rubber Asia | India Rubber Expo & Tyre Show January 2017
NR PRICE OUTLOOK
Jom Jacob
Senior Economist,
ANRPC,
Kuala Lumpur
Besides a favourable demand-supply fundamental, natural rubber market
during 2017 is expected to gain from anticipated trends in crude oil market
and improvement in commodity prices. However, possibility of rubber prices
taking a substantial jump in 2017 is bleak unless global economy shifts to a
much faster track than the anticipated rate
GLOBAL
What’s
NR plantation in South Thailand flooded by heavy rains

2. IRE
2017
Rubber Asia |India Rubber Expo & Tyre Show January 2017 | 33
T
he year 2016 has passed
witnessing a rebound in
natural rubber prices in the
fourth quarter despite the fact that
uncertainties clouding the market
remain. As the New Year begins,
players in rubber industry across
countries are cautiously watching
on potential developments
in the market during 2017.
This is an attempt to review
the factors which drove the prices
up during the fourth quarter
and examine the prospects of
the market in the new year.
During the period from mid-
September to December 2016,
prices of block rubber rose by
46.2% in Kuala Lumpur and 51.9%
in Bangkok (Table 1). For sheet
rubber, while prices jumped 40.2%
in Bangkok, it rose only 11.7% in
Kottayam, India. In India, trading in
rubber was affected from November
onwards due to acute shortage of
cash following demonetization
of currencies announced by the
Indian Government on November
8. Traders in India, by and large,
reportedly abstained from buying
rubber from farmers. As a result,
the market could not gain from the
momentum in overseas markets.
FACTORS THAT IMPACTED
PRICE RECOVERY
OPEC decision to cut oil
output
Recovery in rubber prices during
the fourth quarter of 2016 was
driven by a host of factors which
include uptrend in crude oil prices,
improved US economic outlook and
supply concerns mainly caused by
flood in South Thailand. Crude oil
prices had improved from end of
September 2016 in response to the
initiative by the OPEC to curtail
oil output and the consequent
agreement it reached on November
30 to cut output by 1.2 million
barrels per day (bpd). As non-OPEC
producing countries led by Russia
also joined the move, oil prices
rose by 23.6% from US$ 44.50
per barrel at end of September by
to US$ 55.0 per barrel at end of
RUBBERMARKET
in store for 2017?

3. IRE
2017
34 | Rubber Asia | India Rubber Expo & Tyre Show January 2017
December. Synthetic rubbers being
petroleum-derived products, the rise
in oil prices led to speculation of a
possible substitution of synthetic
rubbers by natural rubber. Although
it is a fact that substitution based
on relative prices is insignificant,
especially for the short-term,
natural rubber prices gained
strength as speculators by and large
made bet on a possible substitution
from synthetic rubbers to natural
rubber. Against 23.6% increase in
Brent crude oil price during the
period from end of September to
end of December 2016, the price
of SMR-20 grade of natural rubber
rose 43.2% in Kuala Lumpur
market.
Forecast of faster economic
recovery
Recovery in rubber prices during
last quarter of 2016 is partly
attributed to an improvement in
the commodity’s demand prospects
in the context of post-election
developments in the US and
renewed expectations of a faster
global economic recovery. The
US economy grew 3.2 per cent in
third quarter of 2016, the strongest
quarterly growth in two years. The
US consumer confidence rebounded
in November to its highest level in
nine years. Adding to it, the IMF
in its World Economic Outlook
released in October 2016 had
suggested a 3.4 per cent growth in
global economy during 2017, higher
than the preliminarily estimated 3.1
per cent in 2016.
Speculations of supply
shortfall
A reported shortfall in supply, and
reactions of speculative investors
to the same, have also contributed
to the uptrend in rubber market.
During the 3-year period from 2014
to 2016, global supply grew at the
average annual rate of 0.2% only
whereas the demand grew at 3.5
per cent average rate. According to
preliminary estimates, global supply
in 2016 was short of demand by
320,000 tonnes. Supply remained
either deficit or closely matching
with demand from 2014 to 2016
(Table 2).
Although supply remained
considerably in excess of demand
during 2012 and 2013, the period
from 2014 onwards has seen
rebalancing of demand and supply.
Furthermore, floods in South
Thailand during November and
December 2016 brought added
concerns over global supply in
the short term. Supply from South
Thailand has special significance
because Thailand accounts for
37% of the global supply of natural
rubber and an estimated 65% of the
country’s supply comes from the
South.
Exodus of speculative hedge
funds
Natural rubber also gained from
an exodus of speculative hedge
funds, particularly in China where
speculative investors by and large
shifted from steel and copper to
rubber. The last quarter of 2016 saw
steel and copper losing attraction
among hedge funds in anticipation
of their robust supply and slowing
demand from infrastructure and
construction sectors in China. Huge
inflow of speculative funds fuelled
rubber futures at the Shanghai
Exchange to touch 19,825 yuan
renminbi per tonne, up 49.6% from
the rate prevailed at the end of
September 2016.
Depreciation of currencies
in China & Japan
Yet another major factor which
supported natural rubber market
during the last quarter of 2016 was
the sharp depreciation of China’s
yuan renminbi and Japan’s yen due
to strengthening of the US dollar
in anticipation of potential hike in
the US policy interest rate. During
the period from September 30 to
December 30, 2016, the Japanese
yen suffered a 13.5% loss against
the US dollar. The devalued yen
made rubber futures at TOCOM
economically more attractive to the
overseas investors. Driven by the
favourable rate of yen, along with a
set of other factors, TOCOM rubber
futures surged 73.9% to 283.9 yen
per kilogram on December 16,
from 163.3 yen per kilogram on
September 30.
Strikingly, the recovery in prices
during the last quarter of 2016 was
partly driven by factors external
to the rubber sector which include
developments in crude oil market
and currencies besides investment
position taken by speculative funds.
While the rebalancing of demand
and supply contributed much in
taking market momentum up
during the last quarter of 2016,
there are concerns over demand-
supply fundamental staying
favourable in 2017.
SUPPLY & DEMAND
ANTICIPATED FOR 2017
Projected global supply
Global area occupied by tappable
rubber trees is expected to expand
by 350,000 ha in 2017 due to
large-scale planting undertaken
across countries seven years ago
(2010) in response to the favourable
prices prevailed during the year.
Trees planted seven years ago are
expected to be opened for tapping
by May 2017 when farmers resume
tapping on expiry of the leaf-
shedding season. During 2017,
global production of natural rubber
is anticipated to increase by 4.6 per
cent to 12,846 million tonnes from
12.280 million tonnes in 2016.
Demand to exceed supply
Global consumption of natural
rubber grew at 3.5 per cent average
annual rate during the period from
2014 to 2016. As suggested by the
IMF in October, global economy
may grow at 3.4 per cent during
2017 as against the preliminarily
estimated 3.1 per cent rate in
Table 1: Weekly Average Prices of NR in Key Physical Markets
Week ended 17 Sept 2016
(US$/100 kg)
Week ended 31 Dec
2016 (US$/100 kg)
% increase
SMR-20 Kuala
Lumpur
132 193 46.2
STR-20 Bangkok 131 199 51.9
RSS-3 Bangkok 159 223 40.2
RSS-4 Kottayam 179 200 11.7

4. IRE
2017
Rubber Asia |India Rubber Expo & Tyre Show January 2017 | 35
2016. The IMF is likely to slightly
upscale its outlook in view of
further improvement of conditions,
especially in the US and Europe.
Demand for rubber is expected to
gain from the anticipated further
improvement in global economy.
Although demand from China may
slowdown, faster growth in demand
from the US, Europe and countries
in Southeast Asia is expected to
offset it. In view of new investments
in auto-tyre manufacturing,
demand for natural rubber is
anticipated to grow relatively faster
in Thailand, Indonesia, Malaysia,
Vietnam and Sri Lanka. Moreover,
crude oil is expected to rule above
US$ 50 per barrel during 2017
suggesting increase in synthetic
rubber prices during the year.
This also can contribute to the
demand for natural rubber through
substitution.
Taking the various factors into
account, global consumption of
natural rubber is anticipated to
grow at a rate ranging from 3.5 per
cent to 3.9 per cent during 2017.
Taking the medium level growth of
3.7 per cent, global consumption
during 2017 is anticipated at 13.066
million tonnes which is 220,000
tonnes more than the supply.
Precisely, global supply of natural
rubber in 2017 is anticipated to
be in short of demand by 220,000
tonnes. The shortfall will be more
severely felt till end of April.
Tightness in supply is expected to
ease after April coincident with
the reopening of trees for tapping
on expiry of annual leaf-shedding
season in major producing
countries. Moreover, the vintage of
trees planted seven years ago will
be newly opened for tapping after
April. This can expand the mature
area by 350,000 hectares.
Risk factors
The projected figures of supply
and demand in 2017 are subject to
upside and downside risk factors.
In the event of global economy
registering a faster-than-expected
growth, demand for natural rubber
can register a corresponding faster
growth. The resultant momentum in
the market may enthuse farmers to
unlock more supply. More attractive
prices can prompt farmers in
Malaysia, India and other countries
to resume harvesting of mature
trees which have been left untapped
for the past few years. Untapped
mature trees occupy 356,000
hectares in Malaysia and 145,000
hectares in India. Favourable
price may also enthuse farmers to
adopt proper farm management
leading to improvement in average
yield. On the other hand, a lower-
than-expected economic growth
can bring down expectations
on demand and send negative
sentiments to the market. This
can bring down expectations on
supply.
OUTLOOK ON CRUDE OIL
The recovery in crude oil market
during the last quarter of 2016
was driven by the OPEC’s deal
on 30 November to cut output by
1.2 million barrels per day (bpd)
for six months from January
Another view of the flooded rubber plantation in South Thaliand

5. IRE
2017
36 | Rubber Asia | India Rubber Expo & Tyre Show January 2017
2017. Following OPEC’s decision,
producers from outside OPEC,
led by Russia, agreed to reduce
output by 558,000 bpd, the largest
non-OPEC contribution ever. But,
OPEC’s members have the habit
of not adhering to respective
agreed targets. Moreover, higher
oil prices raise the chances of other
producers, particularly the US
Shale operators, boosting output.
These factors raise concerns over
possibility of oil prices gaining
further momentum or even staying
at the level of around US$ 55 per
barrel realised at the end of 2016. In
a long-term perspective, oil market
faces threats due to falling cost of
solar energy and battery storage,
increasing sale of electric vehicles,
and popularisation of energy-
efficient ‘smart’ buildings. Number
of battery and plug-in vehicles
around the world has surged in
recent years to one million from less
than 20,000 in 2010. As car makers
offer more electrical vehicles with a
range exceeding 500 km, a shift in
that direction will progressively take
place. Presence of more battery-
charging stations along with
possible ban on gasoline and diesel
cars in more number of cities can
accelerate the shift.
Oil prices are likely to fall in the
long-run in view of the above
developments in the energy sector.
However, in 2017, oil is anticipated
to rule between US$ 50 and US$
55. According to Short-Term Energy
Outlook released by the US Energy
Information Administration on
December 6, Brent crude oil is
anticipated to average at US$ 52
per barrel in 2017, up 20.9% from
the average of US$ 43 per barrel
in 2016. This implies possibility of
synthetic rubbers becoming more
expensive in 2017, compared to
2016, providing ample space for
natural rubber prices to go up.
OTHER NON-FUNDAMENTAL
FACTORS
Influence of currencies
As stated earlier, devalued
currencies of China and Japan
played a role in taking rubber
futures up at Shanghai Exchange
and TOCOM during the last
quarter of 2016. The course of these
currencies during 2017 largely
depends on strength of the US
dollar. The US Federal Reserve has
raised policy interest rates by a
quarter points in December 2016
and signalled a faster pace of rate
increases during 2017. This suggests
possibility of dollar gaining further
strength in 2017 and thereby
exerting downward pressure on
China’s yuan renminbi and Japan’s
yen vis-a-viz dollar. Obviously,
rubber futures at Shanghai
Exchange and TOCOM can
expect a boost from the anticipated
devaluation of respective currencies
against the US dollar. However,
influence of currencies on rubber
futures is usually short-lived.
Role of hedge funds
Another important factor having
potential influence on rubber
market in 2017 is role of hedge
funds. Due to dominant influence of
hedge funds, commodities largely
follow similar trends regardless of
factors specific to each commodity
sector. As natural rubber also
directionally tracks the general
trends in commodities, its future
course depends on the emerging
trends in commodities. According
to Commodity Outlook released by
the IMF in December 2016, a 10%
rise is anticipated in the general
index of all commodities in 2017
compared to 2016. In view of the
improved global outlook and new
developments in the crude oil sector,
the IMF is likely to scale-up its
outlook on commodities. Obviously,
anticipated general trend in
commodities is favourable to an
improvement in price of natural
rubber during 2017.
PRICE EXPECTED IN 2017
While demand-supply fundamental
will continue influencing natural
rubber market, a set of non-
fundamental factors is expected
to play an equally important role
in setting the price trends during
2017. Based on the IMF’s outlook on
global economy, global supply of
natural rubber in 2017 will be short
of demand by 220,000 tonnes. This
is subject to downside and upside
risks depending on emerging global
economic conditions. The expected
deficit in supply is likely to be more
severely felt during the period up
to April on account of seasonal
factors affecting the supply. Besides
a favourable demand-supply
fundamental, natural rubber
market during 2017 is expected
to gain from anticipated trends in
crude oil market and improvement
in commodity prices. However,
possibility of rubber prices taking
a substantial jump in 2017 is bleak
unless global economy shifts to
a much faster track than the 3.4
per cent rate anticipated. Due to
the presence of large extent of
untapped mature area and the
space available for increasing the
average yield across countries,
supply has the potential to increase
much beyond the expected level if
the prices scale too high. This may
prevent the market from staying
significantly high.
Table 2: Global Production and Consumption (‘000 tonnes)
Production Consumption Surplus (+) or Deficit
(-) in supply
Growth in
supply (%)
Growth in
consumption (%)
2011 11,174 11,034 140
2012 11,593 11,046 547 3.7 0.1
2013 12,209 11,370 839 5.3 2.9
2014 12,054 12,137 -83 -1.3 6.7
2015 12,243 12,167 76 1.6 0.2
2016* 12,280 12,600 -320 0.3 3.6
In view of the improved
global outlook and
new developments in
the crude oil sector,
the IMF is likely to
scale-up its outlook
on commodities.
Obviously, anticipated
general trend in com-
modities is favourable
to an improvement in
price of natural rubber
during 2017
* Figures for 2016 are preliminary.