3. Observations from Trends
• In both Bangkok and Kuala Lumpur markets,
prices tracked similar paths during 2016.
• There are four major phases in movement of
prices during 2016:
i. Increasing phase from mid-February to end of April
ii. Decreasing phase throughout during May
iii. Stabilization phase from beginning of June to mid-
September.
iv. Recovery from mid-September onwards.
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 3
4. 100
120
140
160
180
200
4-Jan-16 4-Feb-16 4-Mar-16 4-Apr-16 4-May-16 4-Jun-16 4-Jul-16 4-Aug-16 4-Sep-16 4-Oct-16 4-Nov-16
Daily Prices of STR 20 and RSS 3 at Bangkok
(US$/100 kg)
RSS 3
STR 20
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 4
5. Premium Price of RSS
• RSS 3 ruled considerably above STR 20 throughout
during 2016.
• Premium enjoyed by RSS 3 considerably went up
at times
– On 22 July 2016, RSS-3 price ruled 62 dollar/100 kg
above STR-20 price.
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 5
6. Does NR Price
Move according to
Demand and Supply?
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 6
7. Global Production and Consumption of NR
(‘000 tonnes)
Production Consumption Surplus (+) or
Deficit in
supply (-)
Growth in
production
(%)
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 Likely 12,286 12,600 -314 0.3 3.6
Average growth during 2014-16:
Production 0.2% ; Consumption 3.5%
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 7
8. Favourable Fundamentals
• According to conventional economic theory, price
of a commodity is determined by its demand and
supply (Provided “other things remain same”).
• During the past three year period (2014-2016),
supply grew at 0.2% average annual rate. But,
demand grew faster at 3.5%.
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 8
9. Favourable Fundamentals (Contd.)
• Demand-Supply balance has been favourable to
prices during last three years.
• But, NR prices has stayed almost insensitive to
favourable demand-supply fundamentals during
the past three years. Why?
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 9
10. Why Prices Remained Insensitive to Favourable
Demand-Supply during 2014-2016?
• Effect of low supply from 2014 onwards is partly offset
by the stock accumulated until 2013.
• Mature area substantially expanded from 2013
onwards due to large-scale planting undertaken from
2006 onwards. Therefore, supply has potential to
increase if prices become more attractive. This
psychological barriers prevented NR prices from
moving up.
• Various non-fundamental factors remained
unfavourable to NR, although situation eased from
September 2016 onwards.
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11. Non-Fundamentals Factors Relevant
to NR Market
1. Crude oil trends
2. Currencies of NR-exporting countries
3. Strength of Japanese yen
4. Flow of speculative funds
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 11
12. 1. Influence of Crude Oil
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14. Why TOCOM RSS 3 Tracks Oil Trends?
• TOCOM RSS 3 directionally followed crude oil
trends except during the period from mid-May to
end of September.
• In TOCOM, speculative investors are largely
ignorant of technical limitation of substitution
between NR and SR (synthetic rubber).
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 14
15. Why TOCOM RSS 3 Tracks Oil Trends?
(Contd.)
• They perceive that higher oil price can make
petroleum-derived SR more expensive, and lead to
large-scale substitution from SR to NR.
• They bet on possible substitution from SR to NR.
• As a result, uptrends in crude oil market are
expected to increase TOCOM rubber futures.
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 15
16. How Do Oil Trends Reach Physical NR Market?
• TOCOM futures track oil trends due to speculation
on possible substitution between SR and NR.
• Futures markets (TOCOM, Shanghai and SICOM)
act as transmission belts which bring influence of
non-fundamental factors to physical NR market.
• As a result, Physical markets are expected to track
the trends in futures market.
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17. 100
120
140
160
180
200
220
240
4-Jan-16 4-Feb-16 4-Mar-16 4-Apr-16 4-May-16 4-Jun-16 4-Jul-16 4-Aug-16 4-Sep-16 4-Oct-16 4-Nov-16
Influence of TOCOM RSS 3
on Physical STR 20
TOCOM RSS 3 (Yen/kg)
STR 20 (US$/100 kg)
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 17
18. 2. Currencies of Major
NR-Exporting Countries
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 18
20. • Till end of August, prices of SMR 20 directionally
tracked strength of Malaysian Ringgit.
• But, from September onwards, SMR 20 did not
follow downtrend in Ringgit.
• Due to more dominant influence of other factors,
NR prices has continued gaining strength despite
the weakening of Ringgit from September 2016.
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 20
Influence of Malaysian Ringgit on SMR 20
21. How does Currency Influence NR Market?
• When Ringgit weakens against US$, exporters
need to exchange less amount of US dollar to
make a Ringgit needed to procure cup-lump from
local market.
• A weak Ringgit makes exporters in Malaysia
competitive in international market.
• It provides them extra space to reduce offer price
of NR in international market. Under such
favourable situation, exporters quote lower price
in US dollar to increase business volume.
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 21
22. 3. Influence of Japanese Yen
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 22
23. How Does Yen Influence TOCOM?
• At TOCOM, RSS 3 futures are traded in yen.
• When Yen stays weak against US$, overseas
investors need to spend less amount of US$ to
buy RSS 3 futures. It makes RSS futures
economically more appealing to them and hence
generates higher demand for RSS futures. As a
results, TOCOM RSS futures tend to rise.
• It means, a weak Yen helps rise in TOCOM prices
and a strong Yen works jut the opposite way.
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 23
24. Influence of Yen on TOCOM Futures
• Due to influence of other factors, TOCOM rubber
prices need not always move in accordance with
Yen’s strength.
• The current uptrend in NR prices is helped by Yen’s
sharp depreciation from October 2016.
• This is evident from the graph.
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 24
26. 4. Influence of Speculative Funds
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 26
27. What are Speculative Funds?
• Due to near-zero interest rates, pension funds and
money with rich individuals in advanced countries
largely rely on fund management firms (Hedge
Funds) to get better returns with minimum risk.
• Hedge Fund industry assets reached US$ 3.2
trillion as of November 2015 (Global Hedge Fund
Report)
• In 2015, US$72.5 billion added by capital inflow.
• Funds shift position among commodities, equities,
US dollar and gold (4 major asset classes).
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 27
28. Gold
US $
9 Dec 2016
Commo
dities
Equities
Hedge
Fund
Manager
Seminar by VRA, Ho Chi Minh City 28
29. Why Funds Flow to Commodities?
• When conditions turn favourable to commodities,
fund managers switchover funds into
commodities.
• They take decisions based on:
– Economic outlook, US job market data, and
Purchasing Managers’ Index
– Policy changes in US, China, Japan and Europe
– Outcome of OPEC’s major meetings
– Geopolitics.
• While inflow of huge funds takes commodity
prices up, their outflow keeps prices down.
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 29
34. NR Follows “Commodity Super Cycles”
• Due to dominant influence of hedge funds,
commodities tend to follow similar trends
regardless of factors specific to each commodity.
• NR prices more or less track the general trends in
all commodities
• Due to major influence of hedge funds through
commodity cycles, demand-supply fundamental
have less important role in determining NR
prices.
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 34
35. Influence of Non-fundamentals
• During 2014-2016, demand grew faster at 3.5%
average annual rate as against 0.2% rate of
growth in supply.
• NR market could not gain strength from near-zero
growth in supply and a faster growth in demand.
• Until mid-September 2016, NR market remained
under grip of more powerful influential of :
– Low commodity prices
– Low crude oil prices, and
– Weak currencies of NR exporting countries.
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 35
36. Medium Term Outlook of NR Market
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37. NR market in medium term is expected to be
determined by:
–Movement of commodity prices in response to
emerging global economic trends, and geo-
politics.
–Emerging developments in crude oil market
–Strength of currencies of major NR-exporting
countries
–Emerging developments in supply and demand
for NR.
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 37
38. Price indices of “All Commodities”
(Base: 2005=100)
Price Index of “All Commodities”
2016 Likely 99
2017 Projected 108
2018 Projected 110
2019 Projected 111
2020 Projected 113
2021 Projected 114
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 38
39. Upward Revision
• Above projections of commodity prices were
released by IMF on 18 August. Commodity outlook
has improved thereafter on account of:
– US economic outlook has improved due to
developments after presidential election.
– OPEC’s meeting on 30 November reached an
agreement to substantially cut oil output.
– Outlook on China’s manufacturing sector improved.
Official manufacturing PMI (Purchasing Managers
Index crossed 50 during November 2016)
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 39
40. Price (US$/barrel)
2015 Actual 50.8
2016 Projected 43.0
2017 Projected 50.6
2018 Projected 53.1
2019 Projected 54.4
2020 Projected 56.3
2021 Projected 57.6
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 40
41. • Crude oil prices projected by IMF on 18 August 2016
are likely to be revised up in view of the OPEC’s
agreement on 30 November to substantially cut
output.
• Brent crude oil is anticipated to average at US$ 52 per
barrel in 2017 (up 21% from 2016), as per forecast
released on 5 December by US Energy Information
Administration.
• It currently rules close to US$ 55 which is beyond
OPEC’s target. OPEC may not allow substantial rise in
oil price due to potential threat from Shale Gas.
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 41
42. • It is impossible to make a reliable judgement on
potential movement of Thai Baht, Indonesian
Rupiah, Malaysian Ringgit and Vietnam Dong.
• Largely depends on Trump’s policy on US dollar
and US Federal Reserve’s approach to policy
interest rate.
– Will Trump choose for a weak US dollar to boost the
country’s exports and to strengthen US economy?
– Will Federal Reserve go for hike in policy interest rates
step by step, to reach 2.0% or 3.0% from the
prevailing near-zero rate?
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 42
44. Consumption
(‘000 tons)
Production
(‘000 tons)
Surplus (+) / Deficit (-)
(‘000 tons)
2017 12,971 13,027 56
2018 13,360 13,685 325
2019 13,761 14,421 660
2020 14,173 14,800 627
2021 14,599 15,163 564
2022 15,037 15,379 342
2023 15,488 15,451 -37
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 44
45. Expectations on NR Market
• NR prices are expected to continue tracking the
general trend in commodities.
• Outlook on commodity prices and crude oil trends
suggest possibility of NR market gaining strength in
medium term, although at low pace.
• Due to more powerful role of non-fundamentals,
demand-supply fundamental is likely to have a less
important role in determining future course of NR
prices.
9 Dec 2016 Seminar by VRA, Ho Chi Minh City 45
46. Expectations on NR Market (Contd.)
• Demand-Supply fundamental is anticipated to stay
favourable to market during 2017. But, can exert
downward pressure on NR prices during the period
from 2018 to 2021.
• Any substantial recovery in NR price can unlock
more supply into market and thereby send negative
sentiments to NR market.
• However, supply-induced negative sentiments are
expected to be offset by more powerful influence
of the emerging favorable non-fundamentals .
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47. 9 Dec 2016 Seminar by VRA, Ho Chi Minh City 47
