Rubber prices are down as much as 6 percent this week as traders rush to sell on fears the market will become awash with surplus supply after the Thai government said it would start selling its massive stockpile. The market was spooked after a statement late Wednesday from the Thai agriculture minister saying they may sell some of their 200,000 tons of rubber. This comes amid the low-production season when supply is typically low. The moves are closely watched given the Southeast Asian country is the world's largest producer and exporter, accounting for one-third of global output. The selloff adds to a bleak start to the year for the commodity, used to make tires and latex gloves, with prices down as much as 23 percent on signs China's resource-hungry economy is slowing.

"The announcement is already affecting the markets because many players just believe the news and liquidated their positions over the last few days. Some funds also created new short positions," said Ryuta Imazeki, Tokyo-based analyst at Okachi & Co., one of the top brokers by rubber volumes traded on the Tokyo Commodity Exchange, where global benchmark rubber futures are traded. A short position is a bet that prices will fall. Thai Agriculture Minister Yukol Limlaemthong said the government "will be trying to sell our rubber stocks when the price is right" although added that they won't sell if prices are too bad." Some though are skeptical of a prompt Thai sale because the current government is managing the country in a caretaker capacity due to political protests in Bangkok. The Bangkok-based International Rubber Consortium, a grouping of key rubber producing countries, sought to quell the market panic Thursday by issuing a statement assuring the market that the agriculture ministry has told the group that it has "not made any decision to sell its current natural rubber stocks to the market" and will only consider doing so "if and when the market price of natural rubber is appropriate." Luckchai Kittipol, an honorary president of the Thai Rubber Association, said the gloom over the rubber market may even ease after the Thai government sells its stockpile. "It may be better to sell than to have the prospect of all that supply weighing persistently on market sentiment," he said. The rubber stocks could be put to domestic use, such as road-building, should the government not want to suffer large losses, said Luckchai, who is also the chief executive of Thai Hua Rubber Public Co., the third-largest natural rubber exporter in Thailand.

Otherwise, exporters like himself could absorb some supply amid the current low-production season—as long as they are not priced far above the current market level, he said. The government had implemented a variety of price-support measures in the last two years for rubber, including buying rubber at above market rates—a move that mirrors its rice subsidy program and is aimed at boosting incomes for millions of farmers. The Thai government has been selling from its 15 million stockpile of rice in the last few months through open tenders, the country's agricultural futures market, and government-to-government channel. London-based industry consultancy The Rubber Economist said in its first-quarter report last month that large and rising global stocks, particularly in Thailand, may continue to be the key negative factor on prices. The Thai government rubber subsidies has encouraged rubber output, it added. The firm is forecasting a 650,000-ton production surplus this year.

Source: Wallstreet Journal