Natural rubber could be the ultimate bubble if its price keeps rallying at current rates, the Thai Rubber Association has warned.
"Demand for rubber is now stronger than gold," said Luckchai Kittipol, the association's president.
Last year, the price of natural rubber rose about 80 per cent with an average of Bt106 per kilogram (US$3,600 a tonne) and, in the first two weeks of this year, shot up more than 40 per cent. The cash price in late January 2011 reached a record of Bt175.3 per kilogram due to supply shortages and rising demand from the automobile industry, according to the Rubber Research Institute of Thailand
"Rubber prices have been rising sharply since late last year and are higher than expected now. This raises concerns that if the prices rise further, problems will emerge. Our rubber growers will suffer later [if the prices fluctuate]," Luckchai said.
It is difficult to say what a reasonable price should be now when there is speculation and less supply in the market, but the price should not be higher than Bt150 per kilogram, he said.
Rubber growers need price stability rather than fluctuations, he said. Volatile prices easily cause problems when they peak and plunge dramatically if an asset is overpriced or speculators abruptly shift to more attractive assets.
Natural rubber prices have extended rallies since late last year due to the heavy rainfall in top rubber-producing countries, low production season, inventory taking by rubber growers and middlemen, and growing demand for rubber futures. Speculation by cross-border traders and global investors also triggered a spike in prices.
Last year, prices of commodities especially rubber and precious metals like gold and silver, surged due partly to the shift of global investors to seek higher-yielding assets elsewhere after the US dollar had been weakening.
China, the world's largest rubber consumer, uses about 3 million tonnes of natural rubber a year, while rubber futures trading reached almost 5 million tonnes in only a month.
"This isn't the real price. It's a bubble. This situation is expected to continue until there's confidence that rubber will be sufficient or its prices are too high," he said.
The global demand for natural rubber is expected to be unchanged from last year at 10.3 million tonnes, while supply could be slightly higher at 10.4 million tonnes this year.
Most thought that natural rubber was in short supply but actually it was kept in inventories, Luckchai said. The global inventories amount to 1.5 million-1.6 million tonnes, while Thailand keeps about 400,000-500,000 tonnes in stock.
"Thailand has been slowing down natural rubber sales, while China is speeding up purchases to keep it in factories," he said. This situation could drive up natural rubber prices.
Thailand, Indonesia and Malaysia account for about 94 per cent of the global production of natural rubber. Thailand is expected to produce 3.3 million tonnes of natural rubber this year, of which about 2.8 million tonnes could be exported. Last year, the country's export volume declined by 0.2 per cent to 2.73 million tonnes, while its value soared 83.4 per cent to $7.89 billion.
China, the United States and Japan dominate global rubber consumption, boosted by strong growth in motor-vehicle production and manufacturing. China is estimated to consume 3.5 million tonnes of natural rubber in 2011, followed by the US with 900,000-1.1 million tonnes.
Despite strong demand from both manufacturing and speculation, there are some concerns over China's monetary policy tightening and Europe's sovereign debt problem, Luckchai said.
"China could raise its interest rates further and Europe's a problem. These could affect consumption of natural rubber," he said.
The baht is not likely to fluctuate much this year like it did in 2010 and rubber exporters could handle the baht's movement through hedging.
"What we're afraid of is the substitutes for natural rubber coming in the next few years. Earlier, it wasn't worth doing research and development, but now it is due to the high prices of natural rubber," he said.
Demand for both natural and synthetic rubber is likely to expand at a strong pace, but the division of the market slightly changed in Thailand. Synthetic rubber held about 58 per cent of demand and natural rubber held the remaining 42 per cent in 2009. Now, synthetic rubber is likely to hold more at 60 per cent, while natural rubber is expected to hold less at 40 per cent.
The price differential between natural and synthetic rubber is about Bt50 per kilogram. The synthetic rubber price has been rising in tandem with natural rubber from about Bt60 per kilogram to more than Bt100 now.
How operators - like the manufacturers of tyres, rubber gloves and other rubber products - respond to their rising rubber costs is another concern, he said. They should monitor the rubber situation more closely, and be aware of more price fluctuations and higher material costs, he added.(Syed Rashid Ali, Karachi, Pakistan)