Rubber’s 15 percent slump in about a week may be the prelude to rallies to a record high, driving up the cost of everything from Michelin tires to surgical gloves.
Harvests in Thailand, Indonesia and Malaysia, the biggest growers, will fail to meet demand for a second year in 2011, leaving stockpiles equal to 69 days of demand, the lowest in more than a decade, Goldman Sachs Group Inc. estimates. Prices may advance as much as 32 percent to 605 yen a kilogram ($7,407 a metric ton) by December, according to the median estimate in a Bloomberg survey of 10 analysts and traders.
Bridgestone Corp. and Michelin & Cie., the world’s biggest tire makers, are boosting prices by as much as 15 percent, and Top Glove Corp., the largest rubber-glove producer, is charging more. The rally in rubber mirrors the 93 percent advance in the S&P GSCI Agriculture Index since its June low caused by floods from Canada to Australia and droughts in China and Russia.
While that’s bad news for consumers, it means “the best price I’ve ever seen,” said Saneh Panpipat, 54, who tends about 2,000 rai (320 hectares) of rubber trees in southern Thailand, the country’s main growing region. “My staff and many farmers who were unable to afford their own cars now have brand-new Toyota or Isuzu pickup trucks.”
Heavier-than-usual rain in Southeast Asia, which supplies 70 percent of the world’s rubber, disrupted harvests in the past several months. While farmers will increase supply by 9 percent this year, they won’t eliminate shortages, as demand advances to its highest level since at least 2000, according to the team of Goldman analysts, led by Tokyo-based Yuichiro Isayama.
Benchmark futures on the Tokyo Commodity Exchange jumped more than fourfold since reaching a six-year low of 99.8 yen in December 2008 as the global recession curbed demand. That compares with a more-than-doubling in the S&P GSCI Index of commodities and a 58 percent advance in the MSCI World Index of equities. Treasuries returned about 3.7 percent, a Bank of America Merrill Lynch index shows.
Shortages should mean prices as high as 1,200 yen by the end of the year, said Masayo Kondo, president of Tokyo-based Commodity Intelligence Ltd., the most bullish participant in the Bloomberg survey. The price gained 0.9 percent to 470.50 yen in after-hours trading today. Kondo correctly predicted prices would reach a record in September, when futures markets were anticipating gains of no more than 6 percent through this month.
The 15 percent decline from a record 535.7 yen on Feb. 18 to 457.6 yen at the end of after-hours trading on Feb. 25 reflected the slump across commodities and equity markets amid the conflict in Libya and after the toppling of autocratic leaders in Egypt and Tunisia. Oil in New York climbed to $100 a barrel for the first time in more than two years on Feb. 23 as the MSCI World Index had its biggest weekly rout since November.
“Commodities used for industrial production including base metals and rubber may be vulnerable” if crude keeps rising, said Tomomichi Akuta, an analyst at Mitsubishi UFJ Research & Consulting Co. in Tokyo.
Oil above $120 for a sustained period would likely cause a “meaningful shortfall in global growth,” Jonathan Garner, Morgan Stanley’s chief Asia and emerging-market strategist, said in a Bloomberg Television interview in Hong Kong on Feb. 23.
Higher energy costs and record food prices are already driving up inflation. The U.K. consumer-price index, which includes tires and condoms, increased an annual 4 percent in January, twice the Bank of England’s target.
Record Food Prices
The U.S. consumer-price index gained a greater-than-forecast 0.4 percent in the same month, led by higher prices for food and fuel. Inflation will accelerate toward 2 percent over the next year, the top of the central bank’s target, Federal Reserve Bank of Philadelphia President Charles Plosser said in a speech in Alabama on Feb. 23.
Euro-region inflation accelerated to 2.4 percent last month, from 2.2 percent in December. European Central Bank council member Yves Mersch said officials may toughen their language on inflation, indicating policy makers are growing closer to raising interest rates.
The global economy can withstand higher oil prices for a short period, John Lipsky, first deputy managing director of the International Monetary Fund, said in an interview with Bloomberg Television on Feb. 22.
Rubber supplies will drop in the next few weeks, even if demand weakens. Plantations in Thailand, Indonesia and Malaysia are in their so-called wintering period, when output can drop by as much as 60 percent, according to the Kuala Lumpur, Malaysia-based Association of Natural Rubber Producing Countries. Trees shed their leaves and reduce latex production during the months from February to May.
For now, demand isn’t expected to slow. Global sales of light vehicles will advance 7.9 percent to a record 75.5 million this year, according to Ashvin Chotai, the London-based managing director of Intelligence Automotive Asia Ltd.
Passenger-car sales in China, the world’s biggest auto market, will grow about 10 percent to 15 percent this year, according to the China Association of Automobile Manufacturers. Total vehicle sales jumped 32 percent to 18.06 million last year. China’s economy will expand 9.5 percent this year, almost three times the rate of the U.S., according to the median of as many as 67 economist estimates compiled by Bloomberg.
The jump bolsters demand for tires, whose manufacturers use about 60 percent of the world’s rubber, according to the Singapore-based International Rubber Study Group. Surging commodity prices are also increasing their costs.
Michelin, the world’s second-largest tiremaker, said on Feb. 11 that higher raw-material costs would cut about 1.5 billion euros ($2 billion) from profit this year. The company, based in Clermont Ferrand, France, is raising some tire prices in Europe by as much as 7.5 percent and by an average 8 percent in Japan in May. Its shares rose 9.2 percent in Paris trading this year.
“We will have and we’ll show it again, a very firm and responsive pricing policy,” Jean-Dominique Senard, non-general managing partner at Michelin, told investors on a conference call Feb. 11. “We have increased quite significantly our price in the world everywhere in every segment.”
Global rubber production capacity should increase by almost 40 percent over the next decade and there is an “exuberance” in markets driven by the liquidity from government spending to encourage economic growth, Senard said.
Bridgestone, the world’s largest tiremaker, said Feb. 18 it expects to report a 17 percent drop in profit this year as higher material costs and a stronger yen erode earnings. The Tokyo-based company said this month it will increase prices in North America by as much as 8 percent on April 1, and by as much as 15 percent in Japan from June 1. Its shares rose 6.7 percent in Tokyo trading this year.
“The entire industry is going through very challenging times,” D.P. Singh, vice president of consumer business at Goodyear India Ltd., a unit of Goodyear Tire & Rubber Co., said in Mumbai on Feb. 22. “Commodity prices are going up across industries but the tire industry is especially hard-hit.”
Sumitomo Rubber Industries Ltd., Japan’s second-largest tire maker, said it will boost prices by as much as 10 percent from May. The company forecast Feb. 14 that profit this year will tumble 58 percent from a year earlier.
Top Glove, based in Klang, Malaysia, has been raising prices since rubber started climbing about a year ago, Executive Director Lim Cheong Guan said. The company said in January it would spend about $52 million planting rubber trees in Cambodia to help counter the jump in latex costs.
“Rubber users don’t have much raw material stockpiled, so they have no option but to keep buying,” said Hisaaki Tasaka, a Tokyo-based analyst at brokers ACE Koeki Co.