Tuesday, December 21, 2010

Through the Roof?

For those of you interested in the rubber industry, and there are quite a few judging from the visits I get on those posts, it may not have escaped your attention that the price for crepe rubber has risen to heretofore unseen heights. Here is the relevant table for Cambodia’s main export CSK5L - kg prices in US cents:

Source Malaysian Rubber Exchange

Yesterday the price hit $4,640/mt (or 464 cents per kg). Although it had touched that point once before but came back down to between $4,400 and $4,550/mt. Compared to a low price of around $1,500 to $1,600/mt in March 2009, this is a tripling of prices in 20 months.

By any standard this would be considered unhealthy. Personally, I am a little worried, too, as my experience has taught me that those rapid price increases tend to end up in a crash. This is, of course, all driven by the Chinese economy which hums along at an 8% to 9% growth rate. Economists see a certain danger looming up ahead for the Chinese economy as their growth is also based on an exploding real estate market, and readily available loans from banks, which, however, helped China avoid (just as India did) the severe consequences of the world-wide recession. A real estate bubble and easy money were the same ingredients that led to the crash of the U. S. economy, though; the one big difference appears to be that Chinese banks do not repackage their loans in what later became known as toxic derivatives. China is expected to tighten monetary policy by raising interest rates next year. This should cool down the economy somewhat.

The connection to the rubber growing industry is to a large extent China’s auto manufacturing industry. Today China has the largest single auto market in the world; it surpassed the U. S. in 2009. Coupled with an underproduction of crepe rubber this has led to this explosion of rubber prices. Besides, oil prices also drive other commodities, especially rubber – high oil prices, high rubber prices. Why? High oil prices make synthetic rubber more expensive so the markets turn to natural rubber.

Hopefully, China’s economy will indeed cool down next year, which will then also lead to a stabilization of prices, which is certainly needed in the rubber industry. It’s nice to make some extra money now, and we should enjoy it while it lasts; but we should be wary of a rude awakening. Should it come we can only hope that we won’t fall out of bed in the middle of a nice dream. But then, there are also sage people who say the Chinese economy is going to be growing for the next ten years.  In that sense, investing in a rubber plantation is not a bad idea. The Chinese do it - killing two birds with one stone - securing their supply and earning decent money on their investment.
      18-month old plantation

No comments: