Do we, in 2018, still need a traditional futures market in the Rubber Industry?

If there’s one thing that’s accelerated over the last twenty-odd years, it’s technology, opening up the greyest corner of any business to everyone with a smartphone. It has also meant that there’s little mystery left in anything we do.

“What do I need an intermediary for, when I can do it myself?”

Try it: it doesn’t take long to find out that market structures are there for a reason.

Individually, while we now have the reach and the means to get into all four of the most distant corners of the globe, we DON’T have the TIME to do so. Contact is easy: servicing its hoped-for results isn’t. Twenty-four hours a day is all we have and we need all the help that’s available, with price discovery still very high on the Industry‘s can’t-do-without list.  

The new millennium, with its almost-instant access to information, already nearly two decades old, dawned – after much political upheaval that had seemingly disposed of outdated ideals and devalued theories – with high hopes of a better, more equitable, deal for everyone. Those hopes were soon dashed after a string of disasters – starting early with 9/11 and culminating in the US sub-prime fiasco that sparked the Financial Crisis of 2008-9 – overtook the world, bankers convinced that QE was the only solution, the after-effects of which we’re still having to deal with, the underlying situation perhaps better controlled a decade after the event but certainly not healed or solved, options meantime depleted. The world’s geopolitical situation is probably best ignored to avoid further irritation.

We’re left with a legacy of turbulence in politics and the world economy, both sorely lacking in leadership and realism.    

One can say that natural rubber at least benefitted over the millennium’s first decade, first from the initially game-changing 2001 Bali Agreement, that helped lift its value from under $500/ton, to over $3000 before the crisis and then to well over $5000 after it, and second by a rapidly-emerging China, taking over the No1 importer position from the USA in the first couple of years of the new century.

Unfortunately for the rubber market’s continued stability and reflection of fundamentals, China’s rise came with baggage – rampant speculation, aided in no small measure by that ‘recovery’ from just over $1000 to $5500 at a time when QE was offering low interest rates, bankers not being too fussy about how creatively funds were applied.

One has to remember that natural rubber started out as a plantation industry that was tightly controlled, by large units, acutely aware of its costs and needing regularly to dispose of its produce through the then existing market structures to intermediaries who distributed it as appropriate, it being common that contracts on both sides of the industry stretched as far out as thirty-six months. The trade successfully used a futures or forward market structure, on a ‘whispering’ basis, that reflected true value and was not unbalanced until the advent of official exchanges – latterly electronic – and their clearing houses, funds, commission houses and the speculation they encouraged, in the late 1970’s. 

Trying to cope with an unknown element upset the old market’s balance, one that hasn’t been recovered in the intervening forty years-plus as plantation and estate businesses gave way to smallholder operations and the gradual ceding of Malaysia’s overriding, and it has to be said steadying, dominance to Thailand, Indonesia, China and, latterly, to Vietnam, African rubbers still lacking in influence. The larger traditional operations gave way to a myriad smaller ones, often domestically orientated, previously powerful and respected regional associations ultimately losing control, the industry fractured, trading terms no longer uniform. The rubber industry has effectively lost control over itself. 

What we have today are so-called ‘markets’ that are a poor reflection of fundamentals, their sustainability suspect, in effect an accident waiting to happen. They’re no longer serving the industry but are providing their current masters with decent income, volume and PR, all seemingly more important than veracity or industrial service, manipulated at will, sometimes even without trading. And yet they provide the mechanism for price-fixing more than half of NR’s over-13 million tons of output on average-priced long-term contracts. Often unrealistically. How long can that be tolerated?

So do we actually need futures or forward NR markets? 

Most categorically, yes, but not the ones we already have. If turnover is paramount and if that’s provided by the existing vehicles, let the exchanges tailor them to a moving number for the speculators, in whatever guise they come, but one that prevents them from ultimately going to the wall, although few would mourn them if they did.

If the real industry, the provider of an increasingly ‘critical-list’ material, is to survive and prove itself sustainable, it needs to price its produce realistically on a cost basis. Speculatively high prices lead to excesses.  2011’s $5600 is now reflected in over-planting, surplus and low price. We don’t need a far-forward market, we can make do with three months to help concentrate interest (most major consumers and origin sellers rarely go further forward and if they wish to do so can still trade with the dealing community, but off-market.) Incorporate the new contract into an existing exchange or exchanges, cleared, ensuring the ability to genuinely tender any tonnage of approved material (my preference would be SIR20, with adjustments for other origin tenders, by mutual agreement, at agreed differences). Register as traders only those with a proven interest in the physical trade, including and encouraging producers, processors, end-users and accredited traders, but excluding all speculation, enlarging the minimum lot size, ensuring a full month, or even six weeks, between expiry of the first position and shipment period, to avoid manipulation. 

That may look like a daunting task but one worth attempting as the alternative is a complete submission to rampant speculation with resultant troughs and peaks sealing the industry’s ultimate fate. Will the speculators care? Why should they? A number is a number, whatever it may originally have represented. 

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George Sulkowski
Chief Economist
Corrie MacColl International
sulkowski@corrie-maccoll.com