- Why is Rubber Valuable?
- How Did The Rubber Industry Evolve?
- How Do You Produce Natural Rubber?
- Top 10 Natural Rubber Producing Countries
- Top 6 Uses of Rubber
- What Drives the Price of Rubber?
- 4 Reasons You Might Invest in Rubber
- Should I Invest in Rubber?
- 3 Risks of Investing in Rubber
- Expert Opinions on Rubber
- How Can I Invest in Rubber?
- Rubber Trading Methods Compared
- Top Agricultural ETNs by Assets Under Management
Why is Rubber Valuable?
Rubber is an important industrial material that derives from a runny liquid plant byproduct called latex.
Latex is most often cultivated from the rubber tree, which is indigenous to the Brazilian rainforests. Other plants such as dandelions also produce the milky-white substance.
The origin of rubber traces back to the early civilizations of Central and South America. Long before European conquerors arrived, the indigenous people of the New World used rubber to make bouncy balls, glues and even rubber sandals.
However, the discovery by Charles Goodyear in 1839 of a process called vulcanization transformed rubber from a craft material to a breakthrough product of the Industrial Age.
Vulcanization enabled manufacturers to convert natural rubber into more durable materials.
With the invention of the automobile in the late 1800s, rubber became an essential material in the production of tires, gaskets, hoses, floor mats and other automotive parts.
Beginning in the early 20th century, demand for rubber expanded as products ranging from bike tires to erasers to footwear employed the material in construction.
Today synthetic rubbers made from petroleum products compete with natural rubber in industrial applications.
In recent years global consumption of natural rubber exceeded 12.5 million tons, while global synthetic rubber consumption approached 15 million tons.
The importance of rubber to so many industries ensures that it will remain a leading commodity in global markets.
How Did The Rubber Industry Evolve?
Most natural rubber production comes from latex produced from the Brazilian rubber-tree (Hevea Brasiliensis). Although other species of plants excrete latex when the bark is cut, few produce enough of the substance to make them economically viable.
Despite being native to Brazil, the rubber tree plant is almost exclusively produced in Asia.
Beginning in the late 1800s, English planter Henry Wickham exported 70,000 seeds from Brazil to England. These seeds soon made their way to Southeast Asia where farmers in Ceylon (modern day Sri Lanka) experimented with the plant. By 1895, more than 300,000 hectares of rubber plants grew in Ceylon and Malaysia.
However, the beginning of World War II caused profound changes in rubber production. Realizing that Japan controlled large amounts of rubber-producing territory, the United States sought other sources of production.
The Rubber Development Corporation, finance by US industry, tried many ideas. They sent explorers into the Amazon to search for superior strains of rubber that could be grown closer to home. They even planted dandelions in 41 states. Ultimately, the venture that proved most successful was the development of synthetic rubber using petroleum products. By 1964, synthetic rubber accounted for 75% of the rubber market.
However, the OPEC oil embargo of 1973 created a new disruption for the rubber industry. Surging oil prices caused synthetic rubber prices to double. At the same time, the increasing popularity of radial tires, which required stronger natural rubber, lessened demand for synthetic rubber.
By 1993, natural rubber consumption climbed to 39% of US market share. Today both natural and synthetic rubbers are used to make automobile tires and many other industrial products.
How Do You Produce Natural Rubber?
Rubber trees are tropical plants that require high year-round rainfall with little or no dry season. Dry spells or temperatures below 65 degrees Fahrenheit won’t necessarily kill the trees, but it will reduce the latex output.
Many farmers grow rubber trees with oil palm as they both requiredeep soil, stable high temperatures and continuous moisture. Both trees often require extensive deforestation of land to make room for the crops to grow.
Rubber trees grow quickly and rarely exceed 25 meters in height in plantations. Growers plant the seeds in rows and space them appropriately so that the developing trees receive optimal sunlight.
Once the buds begin to grow, they each form a stem. Each stem produces shoots, which are removed through a process known as disbudding. The stem forms into a fine trunk with branches that form the crown of the tree.
After the first year, farmers replace the trees that have not grown with new seedlings. During this time, the growing trees must be periodically pruned.
Between the fifth and seventh year of growth, rubber trees are ready for tapping. This is the process by which latex is removed from the trunk.
Tapping continues for another 25 to 30 years.
Rubber tree farmers use a special knife to cut a wide, V-shaped incision in the tree’s bark and collect the latex that drips from the plant. They then filter and wash the latex before combining it with acid to get the particles to coagulate.
The unprocessed latex then goes through four more steps to produce commercial rubber:
Machines grind up the raw rubber using mechanical rollers and presses. This makes the material more sticky and pliable.
Chemicals are added to the raw rubber to make it more durable.
Rollers squash the raw rubber into predetermined shapes. Some of the rubber may be squeezed through hollow tubes in a process known as extrusion.
Workers add sulfur to the mixture and heat it to a temperature of 250 degrees Fahrenheit. This process makes the rubber stronger and more durable.
Natural rubber production is highly concentrated in a small handful of countries. About 70% of the global supply comes from three countries – Thailand, Indonesia and Malaysia.
Top 10 Natural Rubber Producing Countries
|Rank||Flag||Country||Rubber Produced (Metric Tons)|
Uses for rubber span across many industries including chemical, transportation, agriculture and aerospace.
Top 6 Uses of Rubber
|Uses Of Rubber||Description|
|Tires||Automobile tires are made up of about 50% natural rubber, while aircraft tires use 100% natural rubber.|
|Other Automotive||Rubber is used in many automobile parts including brake pads, gaskets, hoses and seals on windows, doors and windshields. Rubber is also used to make airbags.|
|Flooring||Gyms, commercial kitchens, animal shelters and playgrounds are a few types of floors often constructed from rubber.|
|Clothing||Natural rubber forms elastic, which is used in wetsuits, cycling shorts and other stretchable clothing items.|
|Erasers||Rubber can wipe away pencil marks.|
|Miscellaneous||Rubber is used to produce a variety of common items:|
Adhesives and coatings
Gaskets for mechanical parts
What Drives the Price of Rubber?
The price of rubber is driven mostly by these five factors:
- Automobile Demand
- Crude Oil Prices
- Trade Policies
- Global Supply and Demand
- The US dollar
About 75% of rubber produced worldwide goes to manufacture tires for automobiles.
In addition, automobile manufacturers use rubber in many other car parts including bumpers, airbags, mats, hoses and seals. As a result, demand for automobiles is the most critical determinant of rubber prices.
Rubber traders should closely follow global automobile sales for clues about the market. Emerging markets, in particular, may be important predictors of rubber prices. China is the largest market for vehicle sales, and, until 2015, was the fastest growing market in the world. India is the largest three-wheeler and second largest two-wheeler market in the world. Changes in vehicle purchase patterns in these economies can greatly impact rubber prices.
Crude Oil Prices
Increases in crude oil prices make synthetic rubber more expensive relative to natural rubber, while decreases have the opposite effect.
Rubber traders should pay attention to the main factors that can influence crude oil prices. Changes in production levels by the OPEC countries have the potential to move markets, as do changes in production from the increasingly large US shale segment.
A sustained rise in crude oil prices could be very bullish for natural rubber prices. Growers need time to clear land and grow rubber plants. This could create a temporary shortfall in natural rubber and higher prices.
The concentration of rubber production means that a few countries wield incredible influence oversupply and prices.
A group called the International Tripartite Rubber Council (ITRC), which is made up of top rubber-producing countries Thailand, Indonesia, and Malaysia, has historically instituted export curbs on rubber to help boost prices. With 90% of global rubber production earmarked for export to big economies such as the United States and China, decisions by this group can have a big impact on supply and prices.
Global Supply and Demand
Because of the long growth cycle of the rubber tree, growers have to anticipate demand well before it materializes. Trees planted today won’t be available for tapping for another five to seven years.
As a result, there is great potential for supply/demand imbalances in the natural rubber market.
Strong economic growth could lead growers to ramp up production. However, economic conditions may be very different when the trees are ready to be tapped. Similarly, growers might curtail production in response to weak economic output. A sudden rise in economic activity could then lead to a supply shortfall.
The US Dollar
As the world’s reserve currency, the dollar can often dictate the direction of commodity prices. When the value of the dollar drops against other currencies, it takes more dollars to purchase natural rubber than it does when the price is high. Put another way, sellers of natural rubber get fewer dollars for their product when the dollar is strong and more dollars when the currency is weak.
4 Reasons You Might Invest in Rubber
Investors should consider buying rubber for the following reasons:
- Bet on Automobile Demand
- Bet On Crude Oil Prices
- Inflation and Weak US Dollar Hedge
- Portfolio Diversification
Bet on Automobile Demand
The automobile market is the most critical industry for rubber producers.
Investing in the commodity might be a way to bet on surging demand for automobiles in emerging market countries such as China and India.
Similarly, the low interest rate environment in the United States and Europe should bode well for the automobile industry. Low rates mean affordable access to credit markets. Since most buyers finance automobile purchases, rates play an important role in determining demand. As long as rates remain near historically low levels, demand for cars, and therefore rubber, should be strong.
Bet on Crude Oil Prices
An investment in natural rubber should perform well when crude oil prices are strong. As crude oil prices rise, synthetic rubber becomes less attractive relative to natural rubber.
Growing demand for energy from emerging markets is one reason crude oil prices might perform well. Similarly, economic growth in developed Western countries remains strong. These factors, along with relatively dovish policies from central banks, could boost crude oil prices.
Inflation and Weak US Dollar Hedge
Investing in rubber is a way to bet on a weak US dollar and higher inflation.
Rubber is priced in US dollars, so the performance of the world’s largest economy can impact its price. The US Federal Reserve Bank has kept interest rates low and the US dollar weak for many years.
US central bankers are likely to continue these policies to support consumer borrowing and spending. These conditions are likely to be very beneficial for rubber prices.
A weak dollar could stoke inflation concerns. Since there are a limited supply of rubber trees, the price of the commodity would likely benefit from fears of inflation.
Most traders have the vast majority of their assets in stocks and bonds. Investing in rubber provides a way to diversify and reduce the overall risk in a portfolio.
Should I Invest in Rubber?
Traders who want exposure should consider purchasing rubber as part of a basket of commodities.
To achieve true diversification, the basket should include rubber along with grains, livestock, lumber, metals and energy. Purchasing a basket of commodities helps protect traders from the volatility of any individual commodity. It also adds diversification to a stock and bond portfolio.
There are three specific trends that could boost rubber prices in the years ahead:
- Automobile Demand
- Crude Oil Demand
Demand for automobiles should rise globally in the years ahead. Emerging market countries such as China and India are building more wealth and purchasing more cars, motorcycles and trucks. Demand for rubber to make tires and other car parts should expand with the auto market. Even electric cars require rubber for tires.
Crude Oil Demand
A growing global economy will likely create increasingly intense competition for energy resources. As oil prices rise, the demand for natural rubber as an alternative to synthetic rubber will grow.
There is a limited amount of land, and many crops such as palm oil compete with rubber for land. This competition has the potential to create natural rubber shortages.
3 Risks of Investing in Rubber
However, traders should also consider the risks of investing in rubber:
- Global spike in interest rates
- Sustained fall in crude oil prices
- Global economic or political turmoil
Global spike in interest rates
A global spike in interest rates or a global recession could depress automobile demand.
Sustained fall in crude oil prices
A sustained fall in crude oil prices could lead to a drop in synthetic rubber prices. This could lead to an increase in demand for synthetic rubber and a drop in demand for natural rubber.
Global economic or political turmoil
Global economic or political turmoil could strengthen the US dollar and weaken demand for commodities.
Expert Opinions on Rubber
Natural rubber prices have been sitting well below long-term averages in recent years.
However, the CEO of a Singapore-based supplier of the commodity believes that the depressed environment may be coming to an end.
He argues that commodity speculators have bundled rubber in with other poor-performing commodities and driven prices lower:
Shanghai futures are “more driven by what they call the black commodity complex, so rubber is bundled with iron ore, with rebar, with coal and that is subject to a lot of speculative interest. With that, the raw material prices move around.”
Robert Meyer, CEO of Halcyon Agri
However, Meyer sees a change in the supply/demand fundamentals that could lift rubber prices along with other commodities:
“This is an extremely interesting time for the rubber market. On a macro level, commodities have been in decline for a number of years, so the supply/demand is tightening. From a price point, this is a very good time to look at this market.”
How Can I Invest in Rubber?
Investors have a limited number of easy options for gaining exposure to rubber prices:
Rubber Trading Methods Compared
|Method of Investing||Complexity Rating (1 = easy, 5 = hard)||Storage Costs?||Security Costs?||Expiration Dates?||Management Costs?||Leverage?||Regulated Exchange?|
The Tokyo Commodity Exchange (TOCOM) and the Shanghai Futures Exchange (SHFE) each have a futures contract on rubber.
The TOCOM contract represents 5 metric tons of Ribbed Smoked Sheet (RSS) No. 3 Rubber, while the SHFE contract settles into 10 tons of natural rubber.
Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, both contracts are physically settled by delivery of rubber.
Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.
These financial instruments trade as shares on exchanges in the same way that stocks do. There is no ETF that offers pure-play exposure to rubber prices. The ELEMENTS Rogers International Commodity Agricultural ETN (NYSEARCA:RJA) holds many agricultural commodities, including rubber, in its portfolio.
Top Agricultural ETNs by Assets Under Management
|ELEMENTS Rogers International Commodity Agricultural ETN|
Shares of Rubber Companies
There are no public companies that are a pure-play investment in rubber. Most rubber plantations are privately owned.
One way to invest in rubber is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of rubber. The value of a CFD is the difference between the price of rubber at the time of purchase and its current price.
Some regulated brokers worldwide offer CFDs on rubber. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that trader can have exposure to rubber prices without having to purchase shares, ETFs, futures or options.
- No commission on trades (other charges may apply)
- Free demo account
- Easy to use (mobile-friendly) platform
- Industry-leading risk management tools
- Trade hundreds of CFDs
- Your funds are safe – publicly listed company regulated by the UK's Financial Conduct Authority and Cyprus' Securities and Exchange Commission
Important: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail trader accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.