29th september, 2010 rubber seasonal report

RUBBER SEASONAL

REPORT

Commodity Exchange Strategy

Rubber TOCOM Buy in the range ¥260-275 targeting

¥325 then ¥380 with stop loss of ¥230

Rubber NMCE Buy at `16200-16400 TP `17800 then

`19000 with stop loss at `14500

29th September, 2010

RUBBER- Seasonal Report Introduction

Naturally, rubber is produced by the process of tapping the plant called Hevea Brasiliensis. These plants

generally have 32 years of economic life but they may live up to 100 years or even more. The plantation

would start yielding from 6th year onwards. The natural rubber tapped is processed to convert it into a

storable and marketable form.

Rubber trees takes 5-10 years to achieve its maturity (tapping) depending upon climatic conditions and crop

management practices. Generally, rubber trees are tapped about once in every two days (each time yielding

about 50 g of latex). When the bark of the tree is tapped, thin slivers of bark are excised; the latex exudes from

the wound and drips into a cup. During winter (lasting for 4-6 weeks), the leaves of the tree die and fall off

and new leaves are formed. The metabolism of the tree and the latex production are substantially affected.

Accordingly, the rubber production fluctuates between months and it is normally low during the rainy

season. These seasonal variations are important factors influencing the market.

The life-cycle of the rubber tree

Source: UNCTAD secretariat

Rubber grades

The most important forms in which NR is processed and marketed are the following

Sheets, Crepes, Block rubber and Preserved Latex Concentrates RSS (Ribbed Smoked Sheets) 1X, 1, 2, 3, 4, 5 Technically Specified Rubber (TSR) - ISNR (Indian Standard Natural Rubber) 5, ISNR 10, ISNR 20 and

ISNR 50 etc. TSR production in India is about 10 % vis a vis 70 % in Indonesia & Malaysia 72,880 MTs of Natural rubber have been physically delivered by NMCE till July

Figure 1: Sector wise usage of natural rubber

Source: www.anrpc.org, and KCTL Research

Tyre industry is the largest user of natural rubber accounting for 55% of world consumption. Other major

users are Latex and Engineering Product (20%), Footwear industry (5%).

World Scenario

Thailand, Indonesia, India, China, Malaysia, Vietnam are the major producers of rubber. The global production

has been hovering between 6-9 million tons with the output topping 8.8 million tons in 2009. Global natural

rubber consumption is 7.9 million tons in 2009, of which 3.9 million tons was consumed in India and China

alone. Around 50-60 % of the global rubber production is used by the tyre manufacturing sector. In this

sector, natural or synthetic rubber cannot be used individually and has to be blended.

Table 1: Quarterly rubber production growth in major producing countries (% Change)

Country Q1 Q2 Q3 Q4 Year

Thailand 24.5 2.7 -3.9 - 3.5

Indonesia 17 2.5 3.2 - 6.2

Malaysia 48.3 -12.4 16.6 7.2 16.7

India 6.2 4.2 11.6 6.4 7.2

Vietnam -26.8 14.6 18.2 7.4 8.3

http://www.anrpc.org/

Figure 2: Major natural rubber producing countries


Association of Natural Rubber Producing Countries (ANRPC) has Cambodia, India, China, Indonesia, Malaysia,

Papua New Guinea, Philippines, Singapore, Sri Lanka, Thailand and Vietnam as its members. The association

represents 94% of the total rubber-growing area in the world. Among the major producing nations, Thailand

is having a largest share of 35% followed by Indonesia (26%), Malaysia (12%) and India (9%).

Thailand

Thailand is the world’s largest producer and exporter of natural rubber. The area and production of rubber

has been increasing over the years. The natural rubber production in Thailand during 2010 is estimated

around 3275 thousand tons, which is 3.5% higher than last year.

Figure 3: Area, Production and Yield of NR—Thailand


Effective replanting policies and economic incentives fundamentally explain the better performance of

Thailand, where government intervention in the rubber sector has been extensive.



Table 2: Natural Rubber Balance Sheet—Thailand (in ‘000 tons)

Year Opening Stocks

Production Import Total Supply

Domestic Consumption

Export Closing Stocks

Total Demand

2004 202 2984 2 3188 318 2637 233 3188

2005 233 2937 2 3172 336 2632 204 3172

2006 204 3137 2 3343 321 2772 250 3343

2007 250 3057 1 3308 374 2704 230 3308

2008 230 3090 2 3322 395 2675 252 3322

2009 252 3164 5 3421 401 2726 294 3421

2010 294 3218 3 3515 412 2735 368 3515


Natural rubber consumption in Thailand has increased by 30% between 2004 and 2010 while production has

increased by 10%. The country exports 75-80% of its production and rest is consumed by local industries.

Natural rubber production in 2010 is likely to increase by 2% to 3218 thousand tons, while domestic

consumption is likely to increase by 3% to 412 thousand tons. However, exports are increasing by a marginal

amount.

Indonesia

Indonesia ranks second in world natural rubber production and export. The country has witnessed a constant

growth in output during 2003 to 2007. However, it started declining from 2007 onwards on poor crop

management practices. Indonesia has the largest acreage of rubber plantation in the world but yield level is

lower, hence, the country is in second position. The acreage of Indonesia in 2010 is 3.44 million hectares

against 2.6 million hectares of Thailand, which is the largest producer in the world.

Figure 4: Area, Production and Yield of NR—Indonesia




Table 3: Natural Rubber Balance Sheet—Indonesia (in ‘000 tons)

Year Opening Stocks


Consumption Export Closing Stocks

Total Demand

2004 23 2066 8 2097 197 1875 25 2097

2005 25 2271 7 2303 222 2024 57 2303

2006 57 2638 7 2702 355 2287 60 2702

2007 60 2755 10 2825 392 2407 26 2825

2008 26 2751 13 2790 415 2295 80 2790

2009 80 2440 13 2533 422 1991 120 2533

2010 120 2592 8 2720 439 2200 81 2720


Domestic consumption of natural rubber in Indonesia more than doubled between 2004 and 2010 while

supply increased by just 17%. Production has been growing at a CAGR of 3.14% since 2004 and domestic

usage is increasing by 14.72% while exports are growing at just 1.62%. This is indicating that the country’s

local consumption is growing very fast than exports. It exports around 85% of total output and remaining is

consumed by local industries.

Malaysia

Malaysia is the third largest producer and exporter of natural rubber in the world. Natural Rubber production

and area have shown a significant growth till 2006-2007. The output witnessed a fall for three consecutive

years on unfavorable weather condition. Economic slowdown started in late 2007 also impacted the

production. Shift in land to palm plantation in Malaysia was also one of the reasons for decline in output.

Figure 5: Area, Production and Yield of NR—Malaysia




Table 4: Natural Rubber Balance Sheet—Malaysia (in ‘000 tons)

Year Opening Stocks



Total Demand

2004 163 1169 426 1758 454 1109 195 1758

2005 195 1126 462 1783 491 1128 164 1783

2006 164 1284 512 1960 638 1134 188 1960

2007 188 1200 558 1946 689 1104 153 1946

2008 153 1072 523 1748 568 1024 156 1748

2009 156 857 748 1761 687 912 162 1761

2010 162 1000 766 1928 637 1123 168 1928


In 2009, the Malaysian rubber production declined substantially by 20%, which made the country to import

huge quantity of rubber during the year. The possible reasons for decline in production and rise in exports

are:

The rubber processing industries were under utilized due to less availability of rubber

The domestic consumption data says it has created apprehension of rubber shortage in the country

that year as the consumption was almost highest ever in last 7 years

Unfavorable weather condition in the country had affected the production badly

The Malaysian rubber production may not increase in coming years due to shift in acreage to palm

plantation

Vietnam

Vietnam is another big producer and exporter of natutal rubber in world. Area and production in Vietnam has

been increasing at faster speed than any other major producing country. The natural rubber production in

Vietnam during 2010 is estimated around 770 thousand tons, which is 8.3% higher than last year.

Figure 6: Area, Production and Yield of NR—Malaysia




Table 5: Natural Rubber Balance Sheet—Vietnam (in ‘000 tons)

Year

Opening Stocks



Total Demand

2004 20 419 153 592 59 513 20 592

2005 29 482 141 652 69 554 29 652

2006 50 555 234 839 85 704 50 839

2007 55 606 195 856 85 716 55 856

2008 106 660 160 926 97 723 106 926

2009 122 720 144 986 120 744 122 986

2010 92 770 133 995 125 780 90 995


Vietnam’s natural production is increasing at a CAGR of 10.52%, domestic consumption at 13.28% and

exports at 7%. The consumption is growing much faster than production. Output in 2010 is expected to

increase by 7% Y/Y to 770 thousand tons while consumption is likely to increase by 4.17% to 125 tons. The

nation exports around 80% of its production.

India

India is the 4th largest Natural Rubber producing country after Thailand, Indonesia and Malaysia. The country

produces almost 9% of the world’s total natural rubber. China is largest consumer of natural rubber in the

world. Last year, India ranked second in consumption surpassing US and Japan.

India’s natural rubber production declined by 3.8% in 2009 to 831 thousand tons due to unfavorable weather

condition and on labor problem at the time of tapping. However, consumption rose by 6.8% to 930 thousand

tons. The peak season for harvesting Rubber in India is from October to January, while the lean period is

during monsoon.

Figure 7: Area, Production and Yield of NR—India


Kerala is the single largest rubber producing state in India accounting for 91% of total production. Kerala and

Tamil Nadu are considered to be the traditional rubber growing regions in the country. In recent years,

among non-traditional region, Tripura has become one of the most preferred states for rubber plantation.



In India, government incentives have stimulated widespread replanting of improved varieties, which has

steadily increased yields. There has also been large investment in supportive infrastructures, including

research.

Rubber trade in India

India’s rubber consumption is not commensurate with production. Domestic production meets 92% of the

consumption and remaining quantity is being imported.

During 2010, the import of NR decreased to 83,000 Tons from 157,000 Tons last year. Export increased to

51,000 Tons from 16,000 Tons last year. The total NR stocks at the end of May 2010 were 230,000 Tons, of

which majority was lying with grower and dealers & processors. The following graph depicts a cyclical

pattern in rubber export-import in India.

Figure 8: India: Natural rubber import & export trend


Table 6: Natural Rubber Balance Sheet—India (in ‘000 tons)

Year Opening Stocks



Total Demand

2004 123 743 73 939 745 71 123 939

2005 123 772 71 966 789 60 117 966

2006 117 861 50 1028 815 71 142 1028

2007 142 811 119 1072 851 29 192 1072

2008 192 881 93 1166 881 77 208 1166

2009 208 820 157 1185 905 16 264 1185

2010 264 895 83 1242 967 51 224 1242


For 2010, India’s natural rubber production is projected to increase by 9% to 895 thousand tons while

consumption is likely to increase by 7% to 967 tons. Imports are projected to decline due to varying taxes

imposed by Indian government.



Factors affecting natural rubber Prices

1. International Natural Rubber Market supply and demand situation and the main rubber producing

countries export Quotes

In the international market, complete control over the supply of natural rubber is in the hands of Thailand,

Malaysia and Indonesia. Import of natural rubber by US and Japan will have a greater influence on the prices.

2. The international market transactions quotes

Natural rubber has become an international commodity, the futures trading in the Far East and Southeast

Asia a prime position. At present, the futures trading in Natural Rubber is available in Tokyo Commodity

Exchange (TOCOM), Japan's Kobe Rubber Exchange (KOBE), Singapore RAS Commodity Exchange and Kuala

Lumpur Commodity Exchange (KLCE). In which, the effects of transactions in Tokyo and Singapore, the

largest market reflect the basic dynamics of the world's rubber prices.

3. Synthetic rubber production and affect of crude oil prices

Natural and synthetic rubber can be interchanged in various usages. When price of natural rubber rises

automatically the demand for synthetic will increase. In addition, petrochemical products used for making

synthetic rubber also have an indirect effect on natural rubber prices, thus crude oil prices also have a

significant effect on prices and demand for natural rubber.

Figure 9: India: Natural rubber import & export trend


Natural rubber and Crude oil prices are highly correlated. Their prices correlation is around 0.85 which

reflects a very good relation in crude oil and rubber prices.

4. Effect of exporting countries currency on rubber prices

The appreciating currency has a negative influence on natural rubber prices. As if the currency of any country

appreciates against dollar it affects exports from that country because an appreciating currency lowers the

export value of that country. In contrast, when a natural rubber exporting country’s currency gains strength

against the dollar, it leads to rise in NR export price.


5. Influence of Yen and TOCOM Futures

The currency of exporting countries and natural rubber prices share an inverse relationship. An appreciating

yen makes yen-denominated futures rubber contracts less attractive and thereby depresses TOCOM rubber

futures. As depicted in below graph when yen gains strength against dollar rubber prices start declining and

vice versa.

Figure 10: TOCOM rubber futures vs. JPY


6. Demand from end users like tyre and related automobile industry

The main users of natural rubber are tyre and auto industry, which directly affect the degree of natural

rubber market. Automobile industry is the biggest consumer of natural rubber, so the development of

automobile industry and policy will affect the demand for tyres and influence the demand for natural rubber.

7. Natural factors: seasonal changes and climate change

Latex is generally collected from rubber trees after 5-7 years of the plantation and economic age of rubber

trees is generally 25-30 years. Rubber trees need high-temperature wet environment, an average annual

temperature of 26-32oC and average annual rainfall above 2000mm for its growth. This type of climate is

mostly concentrated in Southeast Asia.

8. Policy factors

Any change in natural rubber production, import and export policy will affect the natural rubber price trend.

Rubber price seasonality

We have depicted the seasonality of Rubber price movement in the TOCOM, which more or less reflects the

movement witnessed across the globe. The Seasonality Index is prepared by considering data for the last

twenty years. Clearly, as the figure indicates, October-November onwards rubber prices start moving higher

and reach their peak in May. This is another factor which supports the rubber prices to trade higher from

here onwards.


Figure 11: Natural rubber seasonality


Fundamental Outlook (Global)

Natural Rubber prices are expected to show a bullish trend in short to medium term. The major reasons for

upward movement in prices are -

Supply Effect- Tight supply situation may lead to an upside movement in natural rubber prices. Tapping

process has hampered in many producing countries due to heavy rains during July to September. This will

lead to the lower production in Q-3 FY 11. Moreover, rubber plantations are at the end of their economic life

in many countries and large scale replantation is needed. Due to the long gestation period of rubber tree,

most of the farmers in Malaysia are shifting towards more profitable and labour saving crop i.e. Oil Palm. All

these reasons indicate supply shortage globally which may support the rubber prices.

Yen Effect- Yen touched its 15 years high of 82.6 against US dollar on Sep. 14th 2010. This means yen

appreciated against Dollar which is negative for rubber prices which have seen during early September this

year. The Japanese government intervened in the market to limit further appreciation of JPY against USD after

six year. As Japan is the export oriented country, appreciation of Japanese currency may hamper the exports.

Therefore, on September, 15 2010 Japanese Authorities sold more than 2 trillion Yen to limit the yen

appreciation. This intervention is likely to support the natural rubber prices. Japanese government has

indicated that they may further intervene on Yen to support the exports from Japan, Which in turn will give

rise to natural rubber prices.

Crude Oil Effect- Crude oil which is highly correlated with natural rubber prices is projected to trade lower

for medium term. Increasing crude oil inventory levels, slow economic growth are the major factors affecting

the crude oil prices. This may hinder the sharp rise in natural rubber prices. However, the fall in crude oil

prices may be limited due to lower dollar value which may reduce the negative impact of crude prices on

natural rubber prices.


Technical Outlook

TOCOM- Rubber: TOCOM Rubber future prices have been declining for the last four months and it took a

50% correction of the rise 93.3-472 levels. Market is finding a strong support at 282 levels, (50%

retracement) sustained trade above is likely to resume its uptrend. On the other hand, trend line support is

near 265 levels that can push the prices on to the higher side. Moving average principle suggests upside

potential as the prices are trading above the monthly medium term (45) EMA and short term (18) EMA. The

momentum indicator RSI (14) monthly is at 0.55 levels and witnessing a trend line support near 0.52 levels

suggesting upside movements.

Outlook: The key level to watch is at 265 levels and sustain above would lead the prices to trade higher. A

convincing break below 265 levels may reverse the trend. However, chart analysis does not seem to trade

lower.

Recommendation

Buy in the range ¥260-275 targeting ¥325 then ¥380 with stop loss of ¥230

Figure 12: TOCOM rubber futures price movement

Source: Bloomberg and KCTL Research

Fundamental Outlook (India)

Natural Rubber prices are expected to trade higher on Indian exchanges in short to medium term. Apart from

global factors the major reasons supporting the upward movement of prices in India are:

Domestic demand for natural rubber has grown by 8.0% annualized rate during January to July this

year. Tyre companies, which largely stayed away from the market until mid-May, actively entering

into the market for ensuring availability during the monsoon off-season

The impact of ageing of rubber trees on natural rubber supply is more prominent in India than other

producing countries. The production during January-July this year was 5% lower compared even to

the same period before two years, which indicates that supply shortage can be seen in India

Import duty for natural rubber products is levied at the rate of more than 20% which will support

the domestic prices to quote higher

Technical Outlook

NMCE- Rubber: Rubber future prices were seen trading in a consolidation band of Rs.17815-16140 levels for

the past six weeks. The view remains sideways to higher for short to medium term. On the lower side crucial

support is seen at Rs.16155 levels (Trend line supported by 23.6% retracement) sustain above is possible to

remain higher. A significant break below 16155 may lead the prices to see a correction till Rs.14160 levels

(38.2% retracement of the range 19375-5734 levels).Moreover, medium term weekly EMA (45) is showing a

strong support near Rs.15710 levels suggesting upside bias as long as it holds the same. We recommend

buying for short term.

Recommendation

Rubber NMCE: Buy at `16200-16400 TP `17800 then `19000 with stop loss at `14500

Figure 13: TOCOM rubber futures price movement

Source: Reuters and KCTL Research

RUBBER CONTRACT SPECIFICATION (NMCEIL)

Asset Code RUBBER

Product Code RUBBERF

Series Code RBRMMMYYYY

Trading System NMCE’s Derivatives Trading and Settlement System

Trading Hours Monday to Friday :10:00 am to 5:00 pm Saturday :10:00 am to 2:00 pm

Unit of Trading 1 MT

Delivery Unit 1 MT

Quotation/Base Value 100 Kgs

Tick Size Rupee 1/-

Price Band* Daily price fluctuation limit will be +/-3%. Limit on daily price fluctuation will be reckoned with reference to the pervious close price. If trade hits this price limit, trade would stop for 15 minutes, where after price would be extended by another +/-1%. No trade would be permitted during the day beyond then revised price limit of +/-4%.

Quality Specification Ribbed Smoked Sheets 4 (RSS4)

Quality Specifications as provided under Part II Section 1 of the "Green Book" as detailed below: Nothing but coagulated Rubber Sheets, properly dried and smoked can be used in making these grades:

block, cuttings, or other scrap or frothy sheets, weak, heated or burnt sheets, air dried or smooth sheets not permissible.

Slight resinous matter (rust) and slight amounts of dry mould on wrappers bale surfaces and interior

sheets, found at time of delivery will not be objected to .should "rust" or "dry mould" in an appreciable extent appear on more than 20% of the bales sampled, it shall constitute grounds for objection.

Medium size bark particles, bubbles, translucent stains, slightly over smoked rubber are permissible to the

extent shown in the sample. Oxidized spots or streaks, weak, heated, under cured, over smoked (in excess of the degree shown in the

sample), and burnt sheets are not permissible. The Rubber must be dry, firm, and free of blemishes, blisters, sand, dirty packing and all other foreign

matter other than specified above as permissible.

No. of delivery Contracts in a year Maximum 12 monthly or minimum 2 monthly contracts running concurrently.

Delivery Centers CWC Warehouses Cochin / Ernakulum (basis center), Kottayam, Calicut, Malapuram, Tricur.

Opening of Contracts Trading in any contract month will open on the 16th day of the month as per approved calendar

Due Date 15th day of the delivery months if 15th happens to be holiday then previous working day.

Closing of Contract Squaring up of positions will be permitted between 12th and 15th of delivery month. No fresh positions building will be allowed. From 12th to 15th of delivery month, seller can tender Warehouse Receipt for settlement and Warehouse Receipt will be accepted for settlement at closing price of the previous day.

Delivery Logic Compulsory Delivery

Limit on open position Client – 4,000 MT Member – 12,000 MT or 15% of total market open position in the commodity whichever is higher Near Month Limit: Client :1,250 MT Member – 5,000 MT or 15% of the total near month position in the commodity, whichever is higher

Prices Convergences at Expiry

The futures price perfectly converges with the spot price every month on the date of settlement as it ideally

should. As the expiry date of the contract approaches, the spread between the two declines and on the last

day it becomes zero.

Physical Delivery

Rubber futures attracted real hedgers and for the first time in the futures history, cooperative sector have

participant in the futures by taking delivery of rubber. Exchanges have facilitated the delivery based

transaction and buyers and sellers were satisfied from the delivery mechanism of the exchange. Backed by

warehouse receipts and having facilities of CWC warehouses, buyers may remain assure about the quality of

delivered goods while sellers remain assured by the fair value arrived through the trading platform where

number of participants agrees to a particular price at the end of each session.

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29th september, 2010 rubber seasonal report

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