The Economist Intelligence Unit expects natural rubber (NR) consumption growth to continue expanding in 2014-15 at an average of 3.9% as demand recovers in several major consuming countries. This follows growth of 2.7% in 2013, according to the International Rubber Study Group (IRSG). Despite the quickening pace of consumption growth, it will not be enough to eliminate the substantial market surplus in 2014-15 and we expect that prices will favour consumers, especially in 2014. That said, heavy stockpiles in China and Japan will weigh against apparent demand as consumers there will be able to displace imports by drawing down on reserves. China will remain by far the world’s largest consumer in 2014-15, but other emerging regions, such as Other Europe, North America and Latin America, will also help to support consumption growth.
We have revised downwards our forecast for global rubber production in 2014 for a second consecutive month, as a combination of dry weather conditions across South-east Asia (where three-quarters of global rubber production is located) and low prices will result in lower output and production rationalisation. We now expect output to grow by just 0.1% in 2014, largely owing to a downward revision to our Thailand forecast, before bouncing back by 3.3% in 2015. Despite the weak growth in 2014, global rubber output will still reach a record 12.1m tonnes and will mean another year of sizeable market surplus. A notable further downside risk for 2014 is the deteriorating political situation in Thailand, given the potential for rubber farmers’ participation in recent social unrest to affect supply and for exchange-rate weakness to disrupt exports.
Stocks and prices
The net result of our increases in Japanese and North American consumption, and changes to the balance of production in South-East Asia is a slightly smaller market surplus in 2014, of 268,000 tonnes, compared with 294,000 tonnes previously, and 714,000 tonnes in 2013, according to according to IRSG data. The surplus will shrink again in 2015, as growth in global consumption will outpace that in production. (Producers will generally be wary of ramping up output following a period of good supply and falling global prices.) Even with these lower surplus levels, rubber will be amply available in 2014-15 and we expect the stocks/consumption ratio to stabilise above 14 weeks, its highest level since the early 2000s. Much of the excess rubber will be held in China by the State Reserve Bureau and will therefore be unavailable to the market, helping to temper somewhat the impact of the surplus on prices. There has also been stockbuilding at the producer end, as exporters are unwilling to flood the market at a time of low prices.
Despite a small reduction in the expected surplus in 2014 as a result of dry conditions in major producers and production rationalisation, recent bearish market conditions mean we have cut our forecasts for price for RSS3, a Thai benchmark grade used in automobile tyres. We now expect prices to average US$2,455/tonne, from US$2,498/tonne previously. Given the risks to the Thai economy posed by political unrest, it is possible that the price could fall further in US dollar terms on exchange-rate effects. Prices for SMR20, a Malaysian benchmark, are expected to average M$6,560/tonne in 2014 as a whole, down by nearly 16% on 2013 (when prices already fell by 18%). We tentatively expect prices to recover in 2015, but they will still be well off their high levels of 2011.