Since September 2016, the rubber market has suddenly reversed, with continuous rise in the demand and price by more than 100%. However, in the recent time, there is a sharp fall in tire price. Under America’s "double reverse" situation, the operating rate is strangely higher. In the end of last year, companies have come to increase their prices, and so far this trend remains unabated. Why are the reasons behind this round of the market? How long will it last? On the twelfth session of China Rubber Annual Meeting in March, senior professionals in the industry have conducted detailed analyses on this issue: participants from upstream and downstream predict that the future price of natural rubber shall enter a positive and relatively stable situation.
Why Is There an Increase in Rubber and Tire Demand?
Shen Jinrong, the chairman of Zhongce Rubber Group Co., Ltd., believes that there are five reasons behind the surge in domestic rubber market.
First, the domestic heavy truck market takes a turn for the better, and thus contributes to the multiplied increase in matched tire market. Last year, the authorities have carried out a targeted action on restricting overloading and regulating the freight load from August 18, 2016 to August 31, 2017. This policy intervention has lead to a large demand of heavy truck. Domestic heavy truck sales growth has increased by 30% year on year in 2016 (the same hereinafter), and most of them happened after the latter part of the third quarter. In this year, heavy truck sales increased by 122% in January and by 152% in February. It is estimated that the figure will measured reach 100% or more in March. The sales growth of Heavy truck has pulled the multiplied increase in matched tire market.
Second, there is a surge in replacement tire sales. With the rapid price increase in commodities including natural rubber, tire companies have raised their prices. Under the basic principle of “buying up not buying down”, tire dealers, retailers and users are eager to stock more. During this period of time, the sales in replacement tire market have increased at least 20% per month.
Third, the volume growth of truck and bus tire export. Since the United States launched a "double reverse" investigation on China's truck and bus tires early last year, under normal circumstances, there supposed to be a substantial decline in China’s tire export. However, on the contrary, there have been two climaxes in China's exports to the United States: the first is from the initiation of the investigation to the establishment of the preliminary determination; the second is the “window phase” between the beginning of the preliminary determination to the final judge. Because there is no export guarantee in the first phase and the guarantee fee is lower in the second phase, a “window” is left for Chinese tire exports. The truck and bus tire export to the US has dropped by 8.4% annually, while the total export volume has increased by 5.8%.
Fourth, high prices of synthetic rubber lead to companies’ adjustment of formula – increase the amount of natural rubber. Due to the shortage of butadiene, an important raw material of synthetic rubber, there is a surge in price of synthetic rubber and a decline in natural rubber price. Tire and non-tire rubber product enterprises have to adjust their formula in order to increase the amount of natural rubber usage in manufacture. This phenomenon is more common in the non-tire rubber product industry, and they may apply greater proportion of natural rubber in manufacture.
Fifth, the bike sharing economy is sweeping the country now, therefore bicycle tire sales witnesses a double growth. The amazing expansion of bike sharing has triggered a full recovery in the bicycle industry, which contributes to a surge in demand for bicycle tires beyond the imagination.
Shen Jinrong analyzed that, in half a year or so, the above five factors will bring 50,000 tons, 200,000 tons, 30,000 tons, 300,000 tons and thousands of tons of incremental respectively to the China’s natural rubber market. From September, , China's total consumption of natural rubber is expected to exceed 600,000 tons.
According to Li Shiqiang, the General Manager in China of Sri Trang Agro-Industry Co., Ltd., China is the largest natural rubber consumer in the world, accounting for 38.5% of the total consumption of natural rubber. China's natural rubber consumption in 2016 has already exceeded expectation – a conservative estimate of 5 million tons, an increase of 7%. The domestic stock has been significantly consumed. In addition, the demand for latex products also remains strong, mainly in the household. It is expected to increase 10 million tons.
Shen Jirong said that because of the sudden increase in demand in China, the overall supply of natural rubber can meet the needs, but it has consumed a large amount of local and social stock. Thai government’s auction of 200,000 tons of reserve rubber has indirectly maintained a balance in rubber supply and demand. The auction of 120,000 tons of reserve rubber announced on March 14 will continue to support this balance.
Li Shiqiang also believes that in 2016, natural rubber consumption in Southeast Asia is eye-catching as well. In recent years, there are rapid growth of natural rubber consumption in Thailand, Indonesia and Vietnam. Because of their economic development and special geographical location, tire factories from the world have come to invest and set up factories, leading Southeast Asia to become a new rubber downstream processing industry base.
Does the Supply Matches Demand?
According to the China Rubber Industry Association, the national total output of tire is about 106 million with an increase of 7.9% in 2016. Among them, the output of TBR is 121 million with an increase of 10%; PCR 444 million with an increase of 9.6%; BIAS 145 million with a decrease 10%; and the meridian rate is 92.6%. In the first half of 2016, the sales revenue decreased significantly, but by September, it turned out to be a positive growth at the rate of 4.43%.
As is introduced by Shen Jinrong, statistics from the association indicates that enterprise production of TBR increased by 6.62% in January this year. "It should be noted that January 28th is the Spring Festival this year, there will be 3-4 days break for most enterprises around this time according to the practice. Although the actual working day in January reduced by 20%, the output still increased by 6.62% with the daily output growth of more than 20%. On the basis of incomplete statistics in February, industrial output maintained a growth of more than 20%.When it comes to March, the replacement tire market remain buoyant in a euphoric environment.
From the perspective of natural rubber imports, China's natural rubber imports still maintained a growth rate of 2.39% although 5-6 working days were cut in January.
Li Shiqiang also stated that in 2016 the global natural rubber acreage rose slightly, but the yield per unit of rubber plants in main producing countries declined significantly. The main reason is the shortage of rubber tapping workers and plastic farmers and insufficient maintenance investment in rubber plantation, and the labor force has flowed to other areas. This situation will be more and more serious in the next 10 years. In addition, as an agricultural product, rubber production is affected by weather condition. In 2016, a heavy flood occurred in Thailand disturbed the tapping time thus affected rubber output at around 300,000-350,000 tons. But now, it's hard to tell the weather in 2017.
According to production statistics by ANPRC, Thailand's output in 1994 was 4.185 million tons, down by 6.4 percent; in 2017, it is expected to grow by 4.7 percent. The production of natural rubber in ANPRC member countries fell by 2.5% in 2016 and is expected to go up by 4% in 2017. In 2016, the global consumption of natural rubber reached 12.65 million tons with an increase by 4.1%; while the supply decreased by 0.6% to 12.2 million tons, thus the global rubber gap is 450,000 tons.
What is the cause for the price increase?
Since the end of last year, the tire manufacturers have been raising the price of tires. Even though the price of natural rubber falls recently, it fails to stop the manufacturers from increasing the price. Reasons are varied. First of all, the price of raw material rises sharply. Despite of the sharp price rise of natural rubber and synthetic rubber, the price of non-rubber raw materials such as carbon black, rubber additives and skeleton materials rises even more than the rubber. Compared with last September, the price of some materials increases by more than 100%, which is much higher than that in the economic growth period in the past, resulting in a hike in the prices of tire. Shen Jinrong said, "the price of raw material continues to go up, so does the price of tires; otherwise there is no way to transfer the costs." It is known that after several months, the price of tires has rapidly increased by more than 30%. But according to many companies, the increase of tire prices is still far less than that of raw material prices.
Second, in recent years, rising environmental costs and labour costs, higher requirements of the society and market for the quality of products, increasing investments on green products and smart manufacturing are all factors that pose greater pressures on the costs of the tire companies.
Third, strong market demand justifies the stiff price of the tires. Perhaps these reasons could well explain why the price of tires keeps climbing up despite that the rubber price has fallen in the recent month.
When will the tire market strike balance?
Li Shiqiang pointed that with the rubber prices plummeting to 9700 yuan per ton in 2015, it basically hit rock bottom. Now the price is on the way back, and it should strike a rebalance among the interests of upper, middle and down classes. It can be found that the underlying delivery instruments of Shanghai copper market are the major varieties in the circulation, and that there are sufficient participants of spot market, which goes smoothly. In comparison, delivery goods of Shanghai rubber are disconnected with the market, with speculation and fluctuating prices. The future price of natural rubber prices will tend to be normal after experiencing three stages, i.e. steady development, value re-balance and speculation reduction.
According to Shen Jinrong, the mentioned five factors that led to the increasing demand of natural rubber will eventually back to normal except the substitutability between synthetic rubber and natural rubber. But when? It may maintain the status quo for some time from his perspective. At present the total amount of transportation is still increasing and the demand will not decrease at least in April according to the production plan of the auto manufacturers. But the exact time to buy up and not to buy down can be determined, a time when all the commodities begin to fall. With the government’s support to the shared economy, the popularity of shared bicycle will continue, for it now only flourishes in the first and second-tier cities.
In addition, since most places of origin of natural rubber are in their cut-off period, a substantial reduction in supply and a dramatic increase in demand can be seen. Couple with the large amount of previous consumption of the stock, natural rubber market will be rather strong.
Some analyses claim that the recent declining prices of Shanghai rubber result from the fast transport of imported rubber to the port, the rebound of the rubber stock in the bonded areas, and the increasing warehouse receipts of the rubber. The key factor of increasing warehouse receipts of future rubber is that the difference between current prices and future prices becomes lager, and spot businesses in the futures market show a strong willingness to sell the rubber. Although the recent difference is not as disparate as that of the third or fourth quarters in 2016, it is still at a high level compared with the past.
Shen Jinrong stressed that from the five major factors causing the increasing demand for natural rubber, substitutability of the natural rubber and synthetic rubber enjoys the largest weight. With the influence of the long-term shortage of butadiene and ceiling of non-naphtha route at the same time, it can be expected that the price of synthetic rubber will soon stabilize around a certain new level, so will that of natural rubber. “This is my understanding of the long-term pricing mechanism of natural rubber. The main reason for this new pricing mechanism is that, because the ethylene lightening changed the previous market supply and demand of butadiene, the new prices must be much higher than the old prices in the new balance between supply and demand. "
Shen Jinrong concluded finally that due to the time mismatch between the cut-off period and market demand of natural rubber, the price will experience ups and downs. But after the periodic fluctuations, a price mechanism that can be accepted by all parties will occur. Due to the volatile prices of butadiene, which affected the recovery of non-naphtha as its "stabilizer", it has provided the condition for the long-term stability of synthetic rubber and natural rubber and they will be pricing reference for each other be more frequently. In the new balance, their respective dosage proportion will gradually fix, and there will be a relatively positive and stable situation for a tyre plants, rubber businesses and rubber farmers.
As for the rise in natural rubber price, the industry believes that it is a result of growing demand and capital speculation.
Li Shiqiang thinks that the price of natural rubber is not only decided by supply and demand; more importantly, it is determined by capital. For instance, the global natural rubber production in 2016 is 12.2 million tons, while the bilateral trade volume of Shanghai rubber reaches 970 million tons with a turnover of 12 trillion RMB. Among these, the actual natural rubber users may account for less than 5%, which means the price of rubber is controlled by the 95% of the non-rubber capitals. So it is far from enough to decide the rubber price simply based on the supply and demand of rubber. This can also explain why the price of rubber didn't rise sharply on the day in February, when China brought good news of wining the anti-dumping and countervailing duty investigation against the US.
Therefore, according to Li Shiqiang’s analysis, in addition to the significantly improved downstream demands, the huge capital flown into the rubber industry also causes the remarkable increase in the price of natural rubber. Speaking of downstream demand, aside from actual demand of production, there are expected demand, speculative demand, capital demand and safe-haven demand derived from capital market. Given that the capital market often experiences wild fluctuation, the past three years has seen, a dozen times, the price of Shanghai rubber rise and fall by 1300 RMB within one day—which cannot be explained by supply and demand.
Moreover, Shen Jinrong points out that rise in the price of natural rubber and that of synthetic rubber are directly and closely connected, because the shortage of butadiene could lead to a long-lasting strong price of synthetic rubber. And the long-lasting strong price is due to the fact that the increasingly lightening Ethylene changes the supply and demand of butadiene, thus the price ‘ceiling’ of butadiene is made equal to the cost of producing butadiene with non-naphtha, which is much higher that producing with naphtha.
