MUMBAI – Rubber prices, which have fallen 10% over a month, may crash by another 8-10% in the coming three-four weeks as demand is seen flattened due to the extended lockdown on account of COVID-19 pandemic.
Demand from tyre makers, key buyers of rubber, has vanished during the lockdown as manufacturing activity is at a standstill, said Rajiv Budhraja, director general at Automotive Tyre Manufacturers Association.
"The rapid spread of COVID-19 has brought operations to standstill, thereby hindering demand for the commodity," said Joy Alencherry, owner of Maria Rubber Links based in Kottayam, Kerala.
Today, the most-active May contract of rubber on the Indian Commodity Exchange was at 10,932 rupees per 100 kg. Prices have declined 10% on month, and in the next three to four weeks, the contract is seen trading in the range of 10,500-11,000 rupees per 100 kg.
Automobile production has been severely hit by the lockdown, due to which demand for tyres is almost nil. Inventories with tyre manufacturers has piled up, as stock lifting from factories and transporting it to auto manufacturers has stopped.
Tyre production has continued, although at a minimum capacity of 20-25%, and there has been no offtake. This has led to large quantities stockpiled at factory premises and tyre manufacturers are now facing difficulties with storage space, said Ajay Kedia, managing director, Kedia Commodity.
As of February, estimated stocks of rubber were at 280,000 tn, up 20-25% from the previous month, a source at Rubber Board said.
In Apr-Feb, India's natural rubber production was up 10% on year at 680,000 tn, while consumption was down 5% at 1.56 mln tn, according to data by the Rubber Board.
Restarting of Apollo Tyres' Perambra unit and permission to reopen units to manufacture hand gloves, spurred optimism over rubber contracts on domestic bourse. However, continued demand destruction due to prolonged shutdowns across economies has now dampened the outlook for rubber prices.
"There is no conviction in recovery as near-term demand outlook remains grim due to lockdown, which may get extended in some states amid rising spread of COVID-19 infections," said Anu Pai, an analyst with Kochi-based broking major Geojit Financial Services.
Trade in key markets of Kerala has been hit as the nationwide lockdown has been extended till May 17 due to a spike in coronavirus cases. Confirmed cases of COVID-19 in India have crossed 46,400 and the death toll has risen to 1,568.
The inclusion of Kannur and Kottayam among red zones due to positive coronavirus cases has also been a dampener for the natural rubber market, a Kottayam-based rubber broker said, adding that this would bring market activity to a standstill in the near term.
"The extension of the lockdown is negative for natural rubber market, which is already hit by recession in the auto sector due to first phase of lockdown," said Akshay Agarwal of Acumen Capital.
All major automakers, including Maruti Suzuki, Mahindra & Mahindra, Hyundai Motor, MG Motor, and Toyota Kirloskar, reported no domestic car sales during April due to the nationwide lockdown.
GLOBAL CUES
A fall in benchmark rubber contracts on the Tokyo Commodity Exchange is also seen weighing on rubber contracts on the domestic bourse, said Raju Varghese, the owner of Polachirayil Traders based in Kottayam. On TOCOM, rubber contracts are likely to remain under pressure as the coronavirus pandemic has led to concerns over demand for the commodity, analysts said.
Global natural rubber consumption is seen lower due to a shutdown of most industrial activity across the world due to containment measures to curb the spread of coronavirus, the Association of Natural Rubber Producing Countries said in a release. Global consumption of natural rubber is estimated to have fallen 19.6% on year in Jan-Mar, the association said.
"The period since the beginning of March has seen almost the whole world coming to a standstill as the COVID-19 virus assumed a global pandemic with no certain end in sight…The situation has led to closure of manufacturing plants by auto-tyre companies across countries and regions," the association said.
It has pegged global natural rubber output during Jan-Mar nearly 2% higher on year and estimates production in Apr-Jun 3.6% higher on year.
A likely fall in crude oil contracts on New York Mercantile Exchange is also seen weighing on rubber contracts. Crude oil prices are likely to remain under pressure as traders ran out of space to store excess oil in the market. Global demand for the commodity has fallen nearly 30% due to the pandemic, and rekindling of the conflict between the US and China is seen dragging prices lower.
Prices of natural rubber take cues from those of crude oil as the latter is used to make synthetic rubber.
Synthetic rubber is a major substitute of natural rubber and India is major importer of synthetic rubber from oil producing countries. In India, manufacturers use 60% of natural rubber and 40% of synthetic rubber in tyre manufacturing. However, the situation might change after the lockdown as prices of synthetic rubber prices are two-thirds those of natural rubber.
Source Cogencis