Is the Rubber Cartel jacking up prices?

Is the Rubber Cartel jacking up prices? | 29 July 2009 | www.commodityonline.com

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Rubber cartels have a long history and most of the attempts weren’t successful. The Brazilian rubber cartel was broken by the British who brought the seedlings and planted it in Malaysia. The International Rubber Organisation (INRO) another cartel that was formed in 1980 was dissolved in 1999.

The only prevailing cartel, the International Rubber Consortium Ltd is in existence for the past six years and they include the three largest rubber producers, Thailand, Indonesia and Malaysia. Other major producers, Vietnam, India and Brazil are not part of this cartel although efforts to include Vietnam failed.

According to various studies on commodity cartels, rubber cartel has partially succeeded because its objective has narrowed to price stability through supply-side interventions. The cartel has already announced deep cuts to supply reduction this year as recessionary trends have curbed consumption across industries. It may be recalled that an effort to form a coffee cartel failed because other countries began to get attracted to coffee crop due to higher prevailing prices.

In recent times, two factors have led to rallies in TOCOM rubber futures—one is ofcourse, the auto sector growth and consequent hike in consumption of tyres in China and secondly, the announcement in planned cuts in production by the rubber cartel. The rubber futures for December delivery shot up to 185.5 yen at TOCOM the other day, the highest since November.

In July, the rubber futures have so far gained 15% on the announcement of reduced output. Nobody can fault the producers to curb supply in tune with demand and thereby ensuring price stability. However, it should be remembered that price volatility has been intense in many other commodities including crude oil, base metals and agri-softs commodities in the Futures counter and therefore, there is no reason for rubber producers alone to panic.

Rubber cartels weakened in previous years due to the emergence of synthetic rubber as a substitute for natural rubber and more countries becoming rubber producers. According to Sajen Peter, Chairman of India’s Rubber Board, the average price of RSS 4 in 2008-09 in the domestic market was Rs.101.12 per kg as compared to Rs.103.79 per kg reported for RSS 3 in the international market. In the past one year we witnessed crude oil prices swing from $147/bbl to $35 and back to $67 now.

Compared to crude oil, rubber price realization has been more or less stable in major producing countries. Rubber is used in manufacture of over 10,000 products and ofcourse the major consumer is the automotive sector. Hence, one reason why rubber cartels don’t often succeed is because prices are also determined by underlying demand which in turn depends on global GDP growth. Although price stability is a desirable aim for any commodity including crude oil, edible commodities and plantation crops, in a recessionary phase there is no harm even if raw material prices remain lower in order for production to pick up momentum, if it finally leads to increased aggregate demand.

Thailand, Indonesia and Malaysia produced around 7 million tons of rubber last year. In ther first five months of 2009 they have already reduced output by more than 400,000 tons. Exports were cut by 540,000 tons in January to May, compared with a 414,000 ton reduction planned for the first half. El Nino is also showing signs of impacting rubber production in Malaysia and Indonesia as rains will be delayed.

Therefore, a combination of natural and supply-side interventions will keep rubber prices at stable or may be even higher levels in the coming months. But the moot question is whether the cartel has any justification to jack up prices since rubber has often provided reasonable returns to growers in the past twenty years thanks to new clones and productivity increases.