China’s slowing economy has turned many commodities into a rollercoaster this year, causing wide fluctuations in the prices of some raw materials and outright drops in others. The price of rubber – of which Thailand is the world’s largest exporter – has declined roughly 18% from a high in January, largely due to fears that a slowdown in the Chinese economy could drag down auto sales.
But blaming China for a rubber bear market may be overly simplistic. Looking further back, the January peak was a brief rally in a downturn that began in early last year, long before the current fears of a slowdown in China arose. As of late June, rubber prices were about half the record high in February 2011.
The slowdown was partly caused by lower Chinese demand; passenger car sales fell 1.3% in the first quarter, decreasing demand for tires and therefore for rubber. Thailand exported roughly 1 billion tons of rubber to China in 2011, mostly for tires. But the long-term outlook for the Chinese auto sector remains good, indicating other factors were at play. One factor likely the large quantities of new rubber supply that have recently come on line, said Ivo Naumann, managing director at consulting firm AlixPartners. Rubber trees take seven to nine years to yield their first crop, and major plantations created in Vietnam and other Southeast Asian countries in 2003-2004 began their first harvests around the time prices fell.
In addition, economic stagnation in Europe and the US may be to blame for some of the decline in China’s rubber consumption. As of late last year, roughly one-third of Chinese tires were exported, primarily to the US and Europe, Naumann said. With Europe in the middle of a recession and the US slapping punitive tariffs on tires, those exports may have suffered, reducing demand for rubber.
Despite the shaky start to 2012, China’s auto industry seems likely to recover later this year. Annual growth in passenger vehicles sales was in the double digits in April and May, and Naumann said he expects China’s auto sector to grow by at least 7% annually for the next three or four years.
Start your engines
The long-term fate of rubber and Chinese autos rests upon China’s plans for rebalancing. Many economists say that China cannot hope to keep up the pace of rapid investment-based growth that it has over the past decade and that it should shift more to consumption as a source of growth. Consumption has been growing at roughly 8% a year, but that growth has not been enough to keep pace with investments over the last decade.
A side effect of fewer exports and less investment is that China’s rocketing demand for commodities like steel and coal will level off. However, rubber is likely to be an exception. As Chinese earn and spend more, they will buy more cars, boosting demand for rubber. Only about 4.4% of Chinese own cars, compared to an average 13.5% globally and 60% in the US, according to data from The Economist Intelligence Unit. “Thailand, being one of the world’s largest rubber exporters, is certainly going to gain from this,” said Bala Ramasamy, an economics professor at China Europe International Business School.
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