Bonds, Currencies & Commodities
Inclement weather, burgeoning demand push up natural rubber prices

A number of major rubber-producing nations have witnessed extensive damage to their plantations due to heavy rainfall, which has caused a demand-supply shortage 

Prices of natural rubber which have seen an upward movement in recent weeks due to lower supply and higher demand, may remain flat after December, say experts. On Monday, natural rubber touched an all-time high of Rs202 per kg in the Indian market.
 
"Rubber prices are rising as there are supply constraints. Heavy rains in the southern region have affected rubber collection. As there is no respite from these rains, rubber prices may go up by another Rs2 to Rs3 (per kg). However, the weather should improve after December; rubber production will be back on track," said Ibrahim Jalal, treasurer, Indian Rubber Dealers Federation, an all-India rubber dealers' association.

Heavy rain in major natural rubber producing countries (Thailand, Indonesia, Malaysia and Vietnam) has damaged rubber plantations, leading to a supply shortage amid strong demand from consumer-tyre manufacturers in these countries. The growing demand for rubber is fuelling prices almost on a daily basis.

"Prices are increasing in the domestic and international markets. It's difficult to predict tomorrow's prices. There has been unexpected rain in November and it is disturbing the tapping process. Even whatever rubber that has been tapped is not coming into the market," Biney Kurian, deputy director, marketing, Indian Rubber Board, told Moneylife.

"We are expecting a little correction once the weather improves. Many manufactures are running out of stock, so their first objective will be to fill up their inventories," said Mr Kurian.

A CRISIL Research spokesperson told Moneylife, "Global prices of natural rubber have been ruling high in the current year due to supply issues arising from natural calamities in Malaysia and Thailand, two major rubber-producing countries. Domestic prices between April-October were higher than the previous year by 70 %. While we do not expect any further increase in rubber prices for the rest of the year, average prices for FY11 will be higher by 55%-60%."

According to Thailand's Department of Disaster Prevention and Mitigation, about 1.9 million acres of agricultural land, or 4.8% of total arable land, was damaged by floods that spread across 51 provinces in that country.
 
"Bad weather in these countries has affected rubber production and it would prop prices at the international level as well," Mr Jalal said.
 
According to data published by the Indian Rubber Board, last month, the price of Ribbed Smoked Sheet four grade (RSS-4) grew by Rs1,467 to Rs18,112 per 100kg (quintal), while RSS-3 surged by Rs1,337 to Rs18,506 per quintal.

The rally continued in the first week of this month as RSS-4 prices went up further by Rs647 to Rs19,580 per quintal. Prices of RSS-4 on the Bangkok Commodity Exchange increased by Rs 405 to 19,504/100 kg for the first week ending 6th November.
 
In India, rubber production dropped 7.6% to 82,000 tonnes last month compared with 88,775 tonnes in the same month of last year. However, the consumption stood at 81,500 tonnes in October against 77,650 tonnes in the same month of last year.

The drop in production was due to heavy rain in Kerala, according to Mr Jalal.
 
Natural rubber imports in India surged by 81.2% to 18,148 tonnes in October on increased demand from tyre manufacturers and slowdown in production. Surge in prices of rubber has reflected in prices of tyres. Since April, prices of tyres have increased by 10%.
 
"Tyre producers have not increased prices of their products since the last two months, but raw material prices are very volatile and it's difficult for them to fix prices. In the future, if prices show the (same) uptrend, then tyre companies would think of hiking prices of products," a senior official from the Automotive Tyre Manufacturers' Association (ATMA), who preferred anonymity, told Moneylife.
 
According to ATMA, during September, tyre production increased 26% to 1 crore units from 79.8 lakh units, the same month a year ago. The average monthly production for the first six months of this year grew by 28% to 95.3 lakh units compared with 74.4 lakh units during the same period last year.
 

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Commodity market already discounted US Fed’s $600 billion programme

The commodity market, except the crude oil has already discounted the US Fed’s move to buyback the debt from banks and so far have remained flat.

Commodity prices are not likely to witness a great momentum in the long-term following the US Federal Reserve's (the Fed) $600-billion programme to buy debt from banks, which may weaken the dollar further, say analysts.

"The programme will certainly impact the US dollar negatively as the Fed's decision will increase liquidity of the greenback in the market. However, the market was fully aware about the Fed's action so the impact would not be very acute. And I don't think it will create a significant pressure on the dollar," said an analyst from a Mumbai-based research firm.

The Fed also announced that the $600 billion programme would be topped by around $250 billion of re-invested assets, mainly mortgages, from the quantitative easing.

"The market was expecting around $500 billion, but they have come up with $600 billion. They will also continue their re-invest programme, so total would be around $850-$900 billion," said the analyst.

In early trades on Thursday in London, base metals prices gained marginally. Copper for the three-month delivery gained 1.3% to $8,430 per metric tonne, while aluminium gained 0.9% to $2,439 per tonne on the London Metal Exchange (LME). Ony silver was up about 3% and zinc was up 2%.

"We have not seen a great impact of the Fed's announcement on commodities as of today and since tomorrow is the holiday in India, there is not much action in the market," said a senior analyst from Anand Rathi Financial Services Ltd.

"Fundamentals are still not good for commodities. Commodity prices are climbing just because of the depreciation of dollar and will go further, except agriculture commodities, which are still in a better place due to huge demand-supply mismatch situation," added the analyst. 

Analysts also feel that the package announced by the Fed would give some support to crude oil price.

"Crude oil prices indicate the global economic condition in a better way than metals. Since last two to three months, metal prices have recovered very fast. However, crude oil prices are not showing the same performance and are hovering between a broad range of $75-$85 per barrel. Unless the US economy shows some recovery, crude oil prices will not move up much. However the Fed package and China's action to build up its strategic petroleum reserves due to lower crude oil prices, is likely to support oil prices to gain some strength," said an analyst.

JP Morgan Chase & Co and Bank of America Merrill Lynch (BoAML) have also said that crude oil would rebound and may touch $100 a barrel in 2011 as the US economy strengthens its growth. 

"We are expecting maximum price of oil would be $90 per barrel," added the analyst from Anand Rathi Finance.

The analyst was also bullish on gold. He said, "Gold prices will increase due to the dollar factor and fears of inflation. I think it would be a win-win situation for gold." 

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Zinc prices may come down due to high inventories and output

The price of zinc as well its inventory levels and global production is rising. Despite the depreciation of the US dollar, analysts feel that zinc prices will remain below $2,550 level.

Even as zinc prices had hit a 10-month high of $2,600 per tonne last week, prices will remain below or at $2,550 per tonne in the near future due to surge in inventories and production, said analysts.

"We don't think prices will go up beyond $2,550 per tonne. However, as of now, most of the things will depend on the US Federal Reserve's stimulus package. The meeting is going on and the picture will become clear after the meeting," said Navneet Damania, senior research analyst from Anand Rathi Financial Services Ltd. 

As of 2nd November, zinc price was quoted at $2,430.5 per tonne on the London Metals Exchange (LME) with an inventory of about 6.32 lakh tonnes.

Zinc prices have been going up since past two months so is the inventory as well production at various places.

"Zinc prices are shooting up since last two months primarily because of the depreciation of the US dollar as well as due to improvement in the manufacturing Purchasing Managers' Index (PMI) globally (the global manufacturing PMI increased to 53.7 in October from 52.5 in September). However, the price rise is not supported by inventories, which also have gone up, and there are no signs of a fall in inventory levels. This is a rare situation where prices have gone up despite high inventories, so prices of zinc would not sustain on a continuous basis," said a research analyst who does want to be named.

He said, "It is expected that the dollar index will not fall below 75-mark and if there is rebound, then the dollar index would move towards 80 or more which in turn will trigger a fall in zinc prices."
 
Unlike other base metals like copper and nickel, the present production of zinc is more than demand. According to the International Lead and Zinc Study Group (ILZSG), the global refined zinc market is expected to remain in surplus by 2.33 lakh tonnes in 2010 and by 1.61 lakh tonnes in 2011.

Global refined zinc market had a surplus of around 1.66 lakh tonnes over the first eight months this year, while global production registered a growth of 15.3% during the same period, ILZSG added.

During January to August, ILZSG said, the demand for refined zinc metal grew by 17.8%, driven by strong recoveries in Europe, Japan and the Republic of Korea, while China's output rose 23.9% to 33.3 lakh tonnes same period last year. It is estimated that China will add another 3 lakh tonnes of new refined production capacity in the last quarter of 2010, which may put some pressure on prices in the coming months.

Although Shenzhen Zhongjin Lingnan Nonfemet, third largest zinc producer in China, closed one unit at its Shaoguan Lead and Zinc smelter due to environmental concerns, analysts feel it will not have any major impact on the country's total production.

"The China smelter shutdown decision had already fuelled prices marginally, but we don't see much impact as the smelter's monthly output contributes less than 5% of China's zinc production," said the analyst. 

China's production and consumption of zinc will also play major role in price trend.

According to an analyst from Systematix Shares and Stocks India Ltd, China has vast reserves of zinc and is self-sufficient in zinc production and the country hardly depends on imports. So even the country's demand for the metal goes up, prices will not shoot up, he added.
 

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