Rubber prices predicted to soar higher, demand to rise in China, India.

This year could be a golden year for rubber planters, as the extraordinarily high prices of synthetic rubber have prompted more users to turn to natural rubber, according to a rubber trading expert, and reported in the Bangkok (Thailand) Post. Soaring global oil prices have led to a knock-off effect for synthetic rubber, the price of which has for the first time in four decades gone out of sync with its natural counterpart. This has in turn spurred demand for natural rubber as end-users seek a cheaper substitute. At the same time, rapid industrial growth in China and India has pushed up prices for rubber, as well as other commodities.

Chiaki Furui, chairman and CEO of the brokerage Agrow Enterprise, said that both China and India were likely to switch to importing more natural rubber given the currently high prices of the synthetic alternative. The price of synthetic rubber is quoted at $1,750 per metric ton, compared to $1,300 per mt for natural rubber.

China, which used 1.8 million mt of rubber in 2003, has been the world's largest importer and consumer of rubber since 2001. Furui referred to the CRB index of the Commodity Research Bureau to support his prediction. He said that in recent months, the CRB index has been approaching its historic high set in 1980, and continued to shoot up in line with the rising trend of 17 major commodities, including corn, soybeans, wheat, copper, coffee, crude oil and heating oil. Furui said that although the index, which has been published since 1957, did not include rubber, the price of natural rubber had consistently moved in the same direction as the index.

In February 2004, the prices of both natural and synthetic rubber were about the same, at $1,250 per mt free on board (FOB), but over the past year, the gap in the prices has become increasingly noticeable.

Sharing Furui's view is Piyaporn Sae Lim, manager of the Thai Rubber Association, who said the forward FOB price in Bangkok of ribbed smoked sheet number 3 (RSS3) natural rubber was quoted at 50.30 bahta kilogram in April and 50.50 baht in May, a bit higher than in the same months of the previous year. Piyaporn said that besides China, India, the world's second most populous country, had an unabated appetite for rubber over the last couple of years thanks to its rapid economic expansion.

Furui said that unlike Japan and the U.S., China and India were more flexible and did not hesitate to switch their sources of raw materials between natural and synthetic rubber. On the other hand, he said, the widening gap in the prices of natural and synthetic rubber would result in more volatile prices of natural rubber, a positive trend for the country's rubber trade.

According to Furui, the more volatile the prices, the more speculators and hedgers come to the market. Furui, who was a member of the board of directors of the Singapore Commodity Exchange (Sicom) for six years, commented that Thailand had potential to take over from the Tokyo Commodity Exchange (Tocom) as the center of rubber futures trading if the authorities improved the business environment. Also, the country has all the credentials to become a rubber trading hub given its status as the world's largest producing country and the number of players involved.

"For instance, if the market changes some details of rubber contracts, quoting the FOB price instead of the ex-godown price, more Japanese futures investors will be attracted to AFET (Agricultural Futures Exchange of Thailand)," Furui explained. Tocom also quotes the ex-godown price, causing the price in the futures market to be lower than in the physical market by about 10%.

Rubber price movements in Thailand have been dominated by developments on the Tocom, which is in turn sensitive to two currencies, including the U.S. dollar and the Japanese yen, instead of market forces. When the yen weakens against the dollar, the rubber prices on Tocom move upward, and vice versa when the yen strengthens. Furui anticipated that if Thailand becomes the center of futures rubber trading, the foreign currency factor would have less influence on actual rubber prices.