Here’s everything you need to know about investing in rubber

Rubber is a type of commodity which we all are familiar with. It is a raw material derived from natural latex and tapped from rubber trees which are mass cultivated in parts of Asia.

Before diving into getting exposure to rubber prices via rubber futures, it is imperative to understand the supply and demand dynamics for rubber.

 

A distinctively Southeast Asian commodity

The top three rubber producing countries are located near Singapore, namely Malaysia, Thailand and Indonesia. Weather patterns in these geographical regions are optimal for rubber trees to grow and produce latex. Rubber production goes a long way back to the 1900s. You may even have heard stories of your older relatives having to tap rubber trees in the early hours to earn a living by selling their harvest.

Rubber trees require sufficient rainfall to achieve healthy growth and latex production, so dry seasons such as the El Nino which causes an increase in temperature and reduced rainfall around South East Asia is disruptive to latex harvest volumes.

There are 2 distinct broad rubber categories, namely natural and synthetic. Natural rubber is harvested from trees as mentioned above. Synthetic rubber on the other hand, is produced chemically from petrochemical materials derived from crude oil. The gist is that both have near similar chemical properties which can be applied to various similar goods.

Rubber is mainly used in the production of tyres. The automotive industry is a global industry which churns out new cars and models every year in tandem with rising demand and population growth. The tyre industry requires massive amounts of rubber to satisfy end consumers’ demand for new cars or replacement tyres.

Other items which require significant rubber amounts are production of latex gloves and condoms. Incidentally, these industries and their corporate manufacturing plants are located close to rubber production countries like Malaysia and Thailand.

 

Rubber's historical price performance

There are different rubber grades available on the market. The common grades for natural rubber include Ribbed Smoked Sheets (RSS) and SMR-20 (Technical Rubber Specifications). The underlying prices tend to follow a positive correlation.

Prices of rubber has been trending upwards as from 2016 can be seen from the chart below.

The dry weather and the floods hitting major rubber producing country, Thailand, had pushed rubber prices on an upward trajectory since October 2016. On the other hand, the global economic recovery forecasted for 2017 had a positive impact on rubber prices.

To a certain extent, since synthetic rubber (a substitute for natural rubber) is derived from petrochemical-related raw materials, the recovery of crude oil prices may have influenced the upward price trend for rubber.

Global economic growth in 2011 also powered the demand for rubber and rubber prices hit an all-time high in end 2011. Investors with keen foresight may have made a killing going long on the rubber futures in 2011 and end 2016.

 

How can I invest in rubber?

As it is not feasible for individual investors to buy and stock physical rubber, retail investors can gain exposure to rubber prices via futures products traded on the Tokyo Commodity Exchange (TOCOM) and Singapore Commodity Exchange (SICOM).

In Singapore, rubber futures denominated in SGD is available for trading. There are 2 distinct rubber futures with the underlying reference being RSS-3 and TSR20. 

As with investing with commodity futures products, various strategies can be employed. If you are a short term trader, you may utilize charts and technical analysis for day trading. You can also take a fundamental approach with a longer investing horizon by analyzing supply dynamics, export figures and stockpiles as well as demand factors and identify a solid trend for future rubber prices.

However, as a word of caution, investing in commodity rubber futures may lead to losses to investors. The best approach would be to allocate a small proportion of total investable funds into commodity futures. Money management skill is vital to being a successful commodity derivatives investor. Always be mindful to use stop losses to limit losses as price swings of commodity futures can be extremely volatile.

 

(By Chee Hoong Chan)

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