Why Rubber Needs A Bounce
Rebounding occurs everywhere in human society, but most conspicuously in basketball and on the commodities market. The confluence of these two sectors of our civilization comes in the form of rubber, a crucial component of the NBA and the agricultural community alike. Rubber has had a much better 2015 year thus far than most other commodities, especially gold and oil, having grown by 15% since New Year's Day to sit at the current price of just under 83 cents per pound, a one-year high. That didn't prove good enough for some rubber barons, however, who decided it in their best interest to clamp down on existing supply and drive up prices during 2015. With the decline of prices, a confluence of the ten largest rubber producing companies decided in April to restrict the supply of rubber available on SICOM, the Singapore commodities exchange, the world's rubber hub. To say it failed would underscore how poorly the alliance really proved to be.
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At the open of the 20th century, rubber represented a fantastically valuable commodity. The exploding market for automobiles required a consistent supply of rubber while the rarity of the material, until then only grown in southeastern Asia, sent prices up and up. The Brazilian government, or rather the cronies who controlled the state, decided to carve out huge swaths of land through the Brazilian interior to create rubber plantations that, for a time, rivaled the American South's cotton plantations for size, money, and exploitation. The rubber boom turned into a rubber bust, however, as more and more colonies in southeast Asia picked up steam and began devoting large parcels of farmland to growing rubber trees. This forced Brazilian rubber harvesters to turn to more lucrative occupations and swung the center of the rubber world to the east. Today, Thailand, Vietnam, and Indonesia produce more rubber than the rest of the world combined. Such a monopoly makes it possible to control prices strictly -- provided, of course, that all parties want to play along.
Seven nations combine to form the International Rubber Consortium, a commodities alliance with as much scope as OPEC, if far less power. The Consortium determines how much rubber goes into the hands of consumers in the form of everything from gym shoes to monster-truck tires, and rarely does so for the consumer's benefit. Their price fixture controls have become something of a legend in the world of economics. With the inclusion of Vietnam into the Consortium in May, the alliance appeared to have all the tools needed to make certain that a common commodity becomes a very rare commodity. Agreeing to restrict exports by 300,000 tons, or about half a billion dollars, the Consortium withheld nearly five percent of their total stock and nearly three percent of the world's total stocks. With the best of intentions, as always, the IRC saw the price of the commodity roar upwards, gaining ten percent in just a month between April and May. Then, also as always, things began to fall apart.
Inclusion and Exclusion
One of the largest barriers to a rubber monopoly is the science behind artificial rubber. Just as scientists can make artificial snow so that customers can go skiing in August, so too can the create synthetic rubber in order to give customers industrial equipment, manufacturing materials, and springy shoes. The market for synthetic rubber has exploded in just the past decade, with expectations that it will rise to fifty billion dollars by 2020, or half the value of the current non-synthetic market. Since chemists create synthetic rubber from petroleum, furthermore, the lowered cost of crude made it cost effective for suppliers to switch to synthetic rubber at a time when the non-artificial alternative shot up in price. Worse than science, however, was the timing of the decision. IRC sells more rubber to China than to any other nation, including the United States. Rubber footwear alone accounts for nearly one full percent of China's total exports, a tally of $18 billion in total. The collapse of the Chinese stock market in May, in which investors pulled about $1.5 billion in commodities off the market, hit IRC particularly hard. Some member nations chose abandon the alliance in order to generate badly-needed cash flow, unlike members of OPEC, with Vietnam upping exports by no less than 21% while Thailand did the same to a modest 4%. Even so, the damage had been done. Rubber fell to April price levels, making the economic experiment by the IRC a lost gamble. Worse still, the Shanghai Futures Exchange reports 185,000 tons of rubber inventory in storehouses, a figure that's risen by one-third since the start of the IRC supply restrictions. As such, unleashing their supply onto an overcrowded market would be disastrous news for the IRC.
That Ball Won't Bounce
- Rubber faces a particularly unhappy future in the short term due to the confluence of three factors: a huge amount of glut, an oversaturated market, and a cheap alternative. The artificially inflated cost of rubber that has held steady through 2015 won't last much longer.
- Short selling rubber for delivery within the next six to eight months offers an excellent opportunity for investors. Within six months, some IRC member states will have joined the Trans-Pacific Partnership, which has already influenced other commodities, meaning that more and more rubber will trade hands while demand stays low or even declines. Further out than eight months, however, the commodity could rebound thanks to strong holiday spending.
- Analysts agree that the rubber industry will continue to expand further and further in southeast Asia due to the relatively low cost of bringing the product onto the market. Those who do hold rubber in mutual funds should sell high in order to get value from the 2015 bump while there's still value to be had.