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High world rubber price swings to persist

PHUKET, (Thailand): Natural rubber industry experts predicted on Friday that high price volatility seen for the commodity in 1994-1995 would persist this year.

This would give a further boost to the growing role of Japanese commodity exchanges in providing a market place for hedging by producers and consumers, they told an international rubber marketing seminar here.

Michael Coleman, managing director of Cargill International, said increasing price sensitivity of Thai and Malaysian supply, growing consumption by new Asian economies, and a production shift to new and less stable areas, would combine to sustain price volatility of the commodity.

"While the direction of the market is as ever unclear, I believe high levels of volatility are here to stay for the long term driven by deep-seated underlying trends," he said.

Thailand and Malaysia are the world's top and third largest rubber producers respectively.

Ng Kok Tee, deputy chairman of the Malaysian Rubber Exchange and Licensing Board, said a sharp rubber price surge seen in the past two years would resume in the future as producers resist any new severe low price cycle witnessed by the commodity in the early 1990s.

"We believe that the price upsurge of 1994 and 1995 will recur, maybe even more dramatically than before, in the event another period of protracted low prices should recur," he said. Rubber prices, fuelled by a strong recovery in the auto industries in the United States and Europe, shot up to historical highs in February 1995 after years in the doldrums. They have since eased by about 25 percent.

Ng said the underlying cause of the recent price upsurge was strong resistance by the labour force in producing countries to the protracted low price period from 1989 to 1993.

Coleman of Cargill said recent price swings forced many rubber consumers to resort to a mix of direct futures market hedging and a greater use of forward physical purchases from reliable trading partners.

"The cosy world (of previous price stability in the early 1990s) was shattered in the first few months of 1994. Many people in the business received a crash course in practical risk management by the harshest of task masters - losses," he said.

Coleman urged world rubber groups to help discipline producers and consumers defaulting on trade contracts. Price volatility had produced an unprecedented rise in the number of outright contract defaults.

Coleman did not name any offending parties but Thai traders said some small Chinese importers were among the culprits.

He said further price swings would ensure an important role of Japan's 12 commodity markets. "Who now in the business does not look firstly at Japan before making a trading decision," he said.

A nearly five-fold rise in rubber trading turnover at Japanese exchanges in the past five years, to almost 100 million tonnes a year, had a profound impact on world rubber.

Dick Kitamura, chairman of the Kobe Rubber Exchange (KRE), told the seminar that about 20 percent of total rubber trade turnover of Japanese markets was made through his exchange.

He said KRE recently concluded a broad framework agreement with the Kuala Lumpur Commodity Exchange for trading of KRE Rubber Index Futures contracts on the KLCE floor.

"The proposed linkage plan will offer an environment where both Malaysian and Japanese speculators and hedgers can play in the same playing field for their mutual benefits," he said.-Reuter