Rubber producers assert power with exchange plans

Southeast Asian trio presses for more sway over prices

Word surfaced Friday from the International Tripartite Rubber Council (ITRC) meeting held in Kuala Lumpur that Thailand, Indonesia and Malaysia, three of the world's major producers of natural rubber, are planning to establish a regional rubber exchange.

The news comes as international rubber prices hover at lows not seen in some five years. While the three countries mentioned above account for nearly 70 percent of global rubber production, the Tokyo Commodity Exchange and the Singapore Exchange dominate the pricing of the commodity globally. The establishment of an exchange that directly involves leading rubber-producing nations would mark an important step forward for these countries as they try to strengthen their pricing power over the commodity.

The past year has been a sluggish one for the global rubber market. In early October, benchmark rubber futures on the Tokyo Commodity Exchange slumped to a five-year low of 172.4 yen ($1.38) per kilogram, with futures prices on the Singapore Exchange falling to $1.48 per kilogram, the lowest level since 2009. Although contracts on both exchanges have rebounded moderately, benchmark prices have suffered considerably since the end of last year. The most-traded rubber contract for April delivery on the Tokyo exchange closed at 206 yen per kilogram, down around 26 percent compared with the beginning of the year.

Against such a backdrop, parties from Thailand, Indonesia and Malaysia came together at the ITRC meeting last week to discuss measures aimed at shoring up prices. According to a joint statement issued by representatives from the three countries, the trio has agreed to increase domestic consumption by 10 percent annually and to cut supplies by curbing exports, with specific amounts and other details still to be determined.

Also during the same meeting, the three countries agreed to set up a new regional rubber exchange, which is expected to be operational within 18 months and facilitate transactions of spot contracts in its early stages. "The regional rubber exchange will provide a platform for better price discovery and effective hedging functions, bringing benefits to producers, consumers and market players," Datuk Amar Douglas Uggah Embas, Malaysia's plantation industries and commodities minister, was quoted as saying. Other Asian rubber producers such as Vietnam, Cambodia, Laos and Myanmar may also take part in the exchange if they so choose.

Generally speaking, price discovery of natural rubber in international markets is mainly based on prices of futures contracts traded on widely used exchanges. Plans to set up a regional rubber exchange represent an attempt to gain more pricing power by challenging established benchmark futures traded in Tokyo and Singapore, which usually set the tone for the rest of the global market.

The three countries' push for more pricing power seems justified considering that as the world's first, second and sixth-largest rubber producers, Thailand, Indonesia and Malaysia have long had limited control over international rubber prices.

Nearly 70 percent of global natural rubber production and approximately 80 percent of global rubber exports originate from these three countries. Also, since rubber cultivation is an important domestic industry for these producers, having little say in the commodity's pricing also poses a considerable risk to their local economies and social stability.

With the suppression of rubber prices over recent years, protests and demonstrations by disgruntled rubber farmers have become common in Thailand, the world's largest rubber producer and exporter. In response, the Thai government has moved to support rubber prices with tax breaks, subsidy offers and large purchases of rubber with state funds. Such measures may succeed over the short term, yet appear impractical over the long run.

Establishing a regional exchange involving producing countries is an important step along the way toward gaining more pricing power in a key domestic industry. With their own price discovery mechanism, major rubber producers will be able to respond faster to market volatility, thereby lowering their market risks.