22 October 2008

The flurry that goes on immediately after the US originated financial crisis and the ensuing tsunami in the stock markets and economies worldwide sent everybody, or almost everybody, jittery and to the panic button. It had been almost five weeks since Lehman Brothers was sent down the road of bankruptcy on 8 September to trigger off the tsunami and there is yet any silver linings in the clouds.

You can't blame most of the people flurrying around, jittery and pressing the panic button. Just looked at what happened to natural rubber prices. From a record high on 2 July 2008, when the IRCo's DCP was at US 325.74 cents/kg., it plunged by almost 50%, bringing down the DCP to US 164.80 cents/kg. on 17 October 2008, lowest for the year.

It took exactly 6 months for the DCP to reach its peak for the year from US 255.25 cents/kg. on 2 January, a US 70.49 cents/kg. or 27.6% jump. Then 3 months to decline to US 265.08 cents/kg., a drop of US 60.66 cents/kg. or 18.6% on 30 September.

Then imagine, from 30 September to 17 October, in just about 15 trading days, it plunged to US $ 164.80, a shocking sharp plunge of US $ 1.00/kg. or a 37.8% drop, the lowest level for the year.

Just put these movements on a chart and you will see the impact. Such a severe drop in such a short span of time was unprecedented and the market has certainly overreacted, not that it had not been down this road before, albeit in different circumstances.

IRCo initiated its DCP beginning 1 September 2005 starting at US 152.40 cents/kg. For those not familiar with it, the DCP is the Daily Composite Price comprising of prices of RSS3, STR20, SIR 20 and SMR20 on established physical markets which IRCo developed as an instrument to monitor the market. The DCP ended 2005 at US 169.75 cents/kg.

For 2006, it breached the US 200 cents/kg. level on 3 February and a high of US 254.63 on 3 July and closed  the year at US 189.13, after hitting a low of US 150.51 on 22 November.

The DCP was at the lower end of the US 150 cents/kg. to US 200 cents/kg. range for most part of 2005 and the last two months of 2006. Bullish factors then set into the market in 2007 and slowly but steadily pushed the market up to an all time high of US 325.74 cent/kg DCP on 3 July 2008. The decline after that, especially in the first two weeks of October 2008, is the dilemma that we are in now.

Natural rubber prices had been at lower levels as recent as in 2005 and 2006 than what they are currently. The reaction then and now are different, so were the reasons. Market factors and fundamentals ruled during that time. But now even though the fundamentals are still reasonably firm, the pessimistic outlook towards the aftermath of the US financial crisis are so overbearing that it transcends all other factors and fundamentals.

Whilst not advocating that there should not be any cause for concern, at the same time neither should people to be jittery and panicky. We have traveled this road before. It is only that we have been enjoying this rare luxury of high prices these last six to seven years that many of us forget how to manage ourselves in such crisis. God forbid any retraction to those days of the late 1990's and the first two years of the new millennium, before the transcend of the tripartite cooperation, when natural rubber prices were in dire doldrums, for most part hanging just above US 50 cents/kg. Rubber smallholders life styles has changed, so has inflation, cost of living and expectations. This may be the underlying reason for the jitters and panic, the phobia of the return to those depressed years.

Whilst one should not rush through not thoroughly thought of piece meal solutions, neither should we be dragging our feet not noticing the urgency for concerted and full impact oriented efforts.

Under such unstable economic and market conditions worldwide, the outlook for natural rubber will be greatly influenced by non rubber factors and movements. The natural rubber predicament is a long term one which requires a long term solution. Resorting to short term measures such as withholding export or market intervention will only create stock overhang instead of remedying the problem while wasting precious financial resources.

Production cuts should be the order of the day and this should be coupled with coordinated marketing activities by the exporters.

This is easier said than done, given that more than 90% of natural rubber production in the three tripartite countries are undertaken by smallholders, the inter-agencies and inter-countries complicacies, the number of exporters and trade associations involved. Here everybody has to contribute and play their role because we are all in it together and for the continued sustainability of the natural rubber industry, all in the marketing chain from producer to consumer, should ensure that natural rubber prices are at levels remunerative to the producers and fair to the consumers because neither can survive without the other.