Natural Rubber (NR) is probably the most important agro based industrial raw material in the world. The price of this commodity, which constitutes a major chunk of raw material cost of a tyre has been on a steep rise for the last few years. Since 2009, the RSS4 sheet variety, which is the tyre grade natural rubber, has risen nearly 2.5 times from Rs60-70 per kg to over Rs 240 per kg now.

In early 2009, even as analysts were pessimistic on the ability of the global economies to recover from the financial turmoil, firm natural rubber prices had led the way in giving indication to the economic recovery that was already underway, by way of automobile demand to start with. While in some economies this auto demand was triggered by stimulus package, resilient economies like China and India already had a latent demand. Unfortunately the firmness in demand coincided with a period when almost all producing nations were not only having higher number of ageing trees but also were affected by inclement weather and rains; lack of it at times, and excess at times.

According to Association of Natural Rubber Producing Countries (ANRPC)?s December newsletter, global supply of natural rubber is anticipated to fall 6.3% in the fourth quarter as per the revised estimates. This further downward revision, from the previously expected 3.8% fall during the quarter, originates from Thailand (revised down from -28.4% to -33.4%), India (revised down from -1.8% to -4.6%) and Vietnam (revised down from +3.8% to ? 2.8%). Consequent to this revision, this year?s annual supply growth in the ANRPC region is likely to be slower at 5.7% rate than the previously expected 6.6% rate reported last month. India has also revised down its natural rubber production from 8,93,000 tonne to 8,51,000 tonne in this fiscal.

Meanwhile, India?s rubber production in December 2010 was estimated to be 1,01,500 lakh tonne compared to 1,00,850 tonne during December 2009, a 0.6% rise, as higher prices attracted increased tapping soon after excess rains in October-November period. Meanwhile, December consumption is understood to have declined 1.3% to 77,500 tonne compared to 78,500 tonne in 2009, while imports jumped to 71% to 10, 500 tonne according to Rubber Board reports.

However, despite this rise in production and decline in consumption, Indian prices have rallied higher, as international prices, especially Bangkok prices continue pace ahead, at a premium of atleast Rs 25 per kg to Indian prices, prompting Indian sellers to keep quoting higher and higher. Thailand would be entering into its wintering season by Feb end, major consumers from both India and China have been frantically finishing their purchases in view of the approaching lean season, which also coincides with India?s. The situation has also been exacerbated by the swiftness in price rise which had quoted the consuming industries by surprise, forcing a rethink on the pricing, procurement strategies, albeit late. On the face of it, the steeply rising prices are perfectly in agreement with the demand-supply mismatch that should play out for an even longer period, there are a couple of factors that could upset the equation. Both China and India, are now battling rising inflation and are likely to raise interest rates, which could slow down the rate of growth in auto sector an allied industries. If rate hikes roll out in the next couple of months, then there is a high probability of demand easing, and could even result in defaults in March shipments.

Though such a view is highly speculative in nature, it could result in prices easing in the lean season itself. Further if international prices plummet below Indian prices, the reduced import duty benefits that could take effect from March end would also come into play. However, Natural Rubber?s rally is still not a bubble yet, and the commodity cycle has certainly not reached its end yet. Indian rubber prices are likely to stabilize above Rs190 per kg through the year.

?The views are personal