Rubber shortages are about to turn into a flood as China, the biggest consumer, grows at the slowest pace in three years, driving prices paid by Bridgestone Corp. and other tiremakers to the lowest since 2009.
The surplus will reach 402,000 metric tons in the second half, from a 134,000-ton deficit in the first six months, said Chris Pardey, a former commodities trader at Cargill Inc. and Noble Group Ltd. Futures, which entered a bear market last month, will drop a further 20 percent to 200 yen a kilogram ($2,534 a metric ton) in Tokyo by the end of the year, the lowest since October 2009, according to the median of 15 analyst and trader estimates compiled by Bloomberg.
This quarter’s 23 percent decline is the worst since the global financial crisis in 2008 and exceeds a 16 percent retreat in commodities. The slump is reducing income for growers from Thailand to Ivory Coast to Indonesia and costs for Bridgestone, the world’s largest tiremaker. Shares of the Tokyo-based company will advance 33 percent in the next 12 months, the average of 11 analyst estimates compiled by Bloomberg shows.
“We do remain bearish,” said Singapore-based Pardey, who is now the chief executive officer of RCMA Commodities Asia Group and predicted in January that prices would decline because of a weakening global economy. “There is potential for a significant increase in stockpiles in the second half as production picks up quickly and demand slows down.”
Rubber fell 5.1 percent to 250 yen a kilogram on the Tokyo Commodity Exchange this year, 53 percent below the record 535.7 yen reached in February 2011. The Standard & Poor’s GSCI Index of 24 raw materials lost 9.1 percent this year, and the MSCI All-Country World Index of equities gained 3.7 percent. Treasuries returned 2 percent, a Bank of America Corp. index shows.
Traders are increasingly bearish as production expands even as prices slump. The median of 14 estimates compiled by Bloomberg in January was for futures to drop as low as 240 yen this year, a level reached June 4.
Farmers may extract a record 11.4 million tons this year, exceeding demand of 11.1 million tons, according to Pardey. The surplus will reach 320,000 tons, according to Prachaya Jumpasut, the managing director of The Rubber Economist, a London-based adviser to the industry.
Sales of trucks in China fell 6.1 percent in the first five months as passenger vehicles grew 5.5 percent, China Association of Automobile Manufacturers data show. A tire for a medium to heavy commercial vehicle uses as much as 18 kilograms (40 pounds) of natural rubber on average, compared with less than 1 kilogram for a passenger car, according to Jeremie Capron, an analyst at CLSA Asia-Pacific Markets in Singapore.
China accounts for 33 percent of global demand and tires represent 70 percent of natural rubber consumption in the country, according to Sri Trang (Shanghai) Ltd., a unit of Thailand’s biggest publicly listed producer. China’s economy will grow 7.9 percent in the three months to June, slowing for a sixth consecutive quarter, the median of 27 economist estimates compiled by Bloomberg show.
Policy makers are seeking to halt the deceleration. Chinese banks made record loans in May after the government cut the amount of cash they must set aside as reserves for a third time in six months. The central bank cut interest rates this month for the first time since 2008. The U.S. Federal Reserve’s Open Market Committee, which sets the course of policy, begins a two-day meeting today.
The world’s largest emerging-market nations formalized funding pledges to the International Monetary Fund at a meeting in Mexico this week, boosting its lending power to protect the world economy from Europe’s debt turmoil. With the addition of new pledges, the Washington-based lender said it now has received funding commitments of $456 billion, up from the roughly $430 billion it said it had secured in April.
The government of Thailand, representing 31 percent of global supply, is purchasing rubber domestically at above-market rates to help farmers and said last month it will also buy more than 10,000 tons from Tokyo and Shanghai bourses. Thailand and Indonesia, the second-largest grower, are considering measures including export delays and more purchases and are seeking cooperation from Malaysia, the third-biggest shipper, Deputy Farm Minister Nattawut Saikuar said June 1.
While global truck sales will probably drop 2.6 percent this year, purchases of light vehicles should rise 5.8 percent, said May Arthapan, a Bangkok-based director at LMC Automotive Thailand, part of Oxford, England-based research company LMC Automotive Ltd. The Singapore-based International Rubber Study Group, whose membership includes 36 countries, predicts natural-rubber demand rising 3.4 percent this year as supply gains 3.2 percent. It is scheduled to release new forecasts this month.
While commodity analysts are getting more bearish, those following tiremakers are increasingly bullish, with 71 percent covering Bridgestone recommending investors buy the shares. The proportion was 21 percent in January 2011, a month before rubber reached a record, data compiled by Bloomberg show.
The company will report a 69 percent increase in net income to 174.5 billion yen this year, the mean of 13 analyst estimates shows, as production recovers from the earthquake and tsunami that battered Japan’s industry in March 2011. The preceding month, analysts were predicting profit of as little as 124.1 billion yen for 2012, data compiled by Bloomberg show. Shares of Bridgestone dropped 0.9 percent this year and will reach 2,308 yen in 12 months, according to the estimates.
Shares of Michelin & Cie., the second-biggest tiremaker, will rise 32 percent to 65.23 euros in the next 12 months, extending this year’s 8.1 percent advance, the average of 13 analyst estimates shows. Of the 22 analysts covering the Clermont-Ferrand, France-based company and tracked by Bloomberg, 77 percent recommend buying the stock.
Tiremakers will have ample supply, with stockpiles held by traders and in bonded warehouses at Qingdao, the main hub for Chinese imports, rising 20 percent to a three-year high of 332,600 tons by December, according to the Association of Natural Rubber Producing Countries. The Kuala Lumpur-based group’s 11 members represent about 93 percent of production.
Inventories are increasing as Chinese demand drops 2.3 percent to 3.69 million tons this year, according to RCMA. European consumption will probably decline 3.7 percent to 1.43 million tons as U.S. usage stays little changed at 964,000 tons, the trading group estimates.
“It would be quite impossible for any other country to plug the hole left by a decline in Chinese consumption,” said Lou Zhi, the head of the trading department at Hunter Capital Ltd., a commodity hedge fund based in the northeastern Chinese city of Dalian. “A structural bear market is in place for industrial commodities.”
— With assistance by Aya Takada, Supunnabul Suwannakij, and Feiwen Rong