Explained | Why the Prices of Natural Rubber RSS4 Kottayam Broke the Support of INR 150 per kg Mark?

The price of natural rubber (NR) in the Indian market has dropped to a 16-month low of INR 150 per kg (RSS grade 4). The price of latex, which had risen during the pandemic owing to high demand from glove manufacturers, fell even more, with prices falling below 120. Why did Natural Rubber RSS 4 break the support of INR 150 per kg? what will be the next? are the most anticipated questions in the current situation.

The following factors will explain why the prices broke INR 150 per kg support.

• Higher supply season globally and domestically
• Lower demand prospects
• Currency depreciation
• Global natural rubber prices
• Freight rates
• Import price parity
• Higher imports of NR during October, November, and December 2021 led to an increase in the NR stock levels in India

Higher supply season globally and domestically

Globally, the production of natural rubber increases from July and extends till the month of January in the major natural rubber producing belts such as Thailand, Vietnam, India, etc.

The favorable weather conditions encourage the tapping of the latex in these areas leading to the increase in the arrivals of the natural rubber grades in the spot markets. Usually, the production of natural rubber is higher during the second part of the year as compared to the consumption of rubber.

Lower demand prospects

World demand for NR is slowing down. Demand performance during the rest of this year will be worse than the performance until now due to the global economic downswing. Demand prospects are severely challenged in the case of China and Europe in particular. All the major indicators such as PMI, and auto sales are indicating a negative direction.

Currency depreciation

An increase in the interest rate from the FEDs resulted in an increase in government bond yields. The investments in the government result in the increased demand for the dollar in the markets, leading to the depreciation of the local currency.

The U.S. dollar serves as both the global reserve currency and the unit of exchange for the majority of commodities. The growth in commodity prices in foreign currencies tends to be weighed down by a stronger dollar.

Global natural rubber prices

In 2022, the prices of the RSS3 in Thailand decreased by 37% since the high of April 2022, while the prices of STR 20 decreased by 29% from the high of February 2022.

The natural rubber prices at the sheet and block front decreased predominantly owing to the increase in the seasonal production along with the concerns of the demand prospects globally especially in China owing to the restrictions.

Freight rates

The Baltic Dry Index (BDI) is an index of average prices paid for the transport of dry bulk materials across more than 20 routes. The Baltic dry index declined by 73% since the high of April 2022. The prices of the INR are currently trading at USD 1612 per ton from USD 4820 in April.? The decrease in the shipping charges results in a decrease in the landed cost of the imported natural rubber in India.

Import price parity

The devaluation of the currency in the countries that export natural rubber is lowering the price of natural rubber imported into India along with the decrease in the shipping charges. Moreover, the seasonal patterns that are bearish for the global rubber markets have caused a correction in the international spot markets front.

This has caused the import parity between domestic and imported block rubber from India at the similar price, making imported rubber similar to the domestic prices and making it an appealing price for the higher import of the material as compared to the previous 5–6 month period for the stockiest and tyre makers.

Higher imports of NR during October, November, and December 2021 led to an increase in the NR stock levels in India

Previously, during OND-21, a higher volume of imports was seen in India when the import differential was close to INR 9–10 per kilogram. During OND-21, India imported 169 thousand tons of rubber at levels that were several years high. The 141 thousand tons of natural rubber were imported during JFM'22, an increase of 18% over the previous year. The increase in TSR rubber inventories in India is a result of the cheap cost of imports during October, November, and December-21.

160 thousand tons of natural rubber are expected to be imported during JAS'22. As a result of the block of rubber imports throughout the previous quarters, India's rubber stocks have increased from 30 thousand tons in 2018-2019 to 50 thousand tons currently, averting a sudden increase in price.

KEY TAKEAWAYS

• The seasonally higher production season in natural rubber producing nations including India has led to the higher supply of the natural rubber globally,?and lower demand prospects from the major NR consuming nations lead to the bearish trend in the global NR prices, moreover, at the domestic front, the decrease in the shipping charges have effectively decreased the landed cost of the imported rubber leading to the lower import price parity resulting in the higher imports of the natural rubber in India during last quarter of 2021 and first quarter of 2022. The higher imports of natural rubber led to the increase in the stock levels of the natural rubber in India as a result the natural rubber prices (RSS4) at the Kottayam spot market couldn’t sustain the support of INR 150 per kg mark.
• Moving forward, the higher production season of natural rubber is expected to continue till January next year, which is expected to allow natural rubber to continue the negative trend on the global front, while the expected seasonal procurement from China may avoid the extended fall in the NR prices. So on the domestic front, higher stock levels of NR and lower import price parity will prove to be bearish for the NR prices but higher domestic and export demand for tyres may provide some support for NR prices.
• The RSS4 prices in the Indian spot markets may continue the downward trend and find support towards INR 140 per kg in the near to medium term.