In this guide we explain the main reasons why some traders choose to invest in rubber, what experts think, and how to get started trading different financial instruments for rubber.
In a hurry? If you want to get started trading rubber, here are brokers available in to consider:
Traders can speculate on rubber prices in several ways, including:
- Rubber futures trading
- Buying stocks in companies dedicated to rubber manufacturing
- Exchange-Traded Funds (ETFs) in areas with rubber-related industries
To help you get started, we have compiled a list of brokers offering rubber trading instruments. This guide also informs you about the reasons to consider rubber trading and what the possible risks are.
Important: This is not investment advice. We present a number of common arguments for and against investing in this commodity. Please seek professional advice before making investment decisions.
Reasons You Might Trade Rubber
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.
The 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
Trading 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 is 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. Trading rubber provides a way to diversify and reduce the overall risk in a portfolio.
How to Trade Rubber
Traders have a limited number of easy options for gaining exposure to rubber prices:
Rubber Trading Methods Compared
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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 the delivery of rubber.
Trading 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.
However, the ELEMENTS Rogers International Commodity Agricultural ETN (NYSEARCA:RJA) holds many agricultural commodities, including rubber, in its portfolio.
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 trade 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.
Which Commodity Brokers Offer Rubber Trading?
Here’s a list of regulated brokers available in that offer CFDs and other trading products on commodities such as rubber.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 71.00%-89.00% of retail investor 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.
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.”
Trends to Consider When Trading Rubber
Traders who want exposure should consider purchasing rubber as part of a basket of commodities. 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:
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.
Possible Risks of Trading Rubber
Traders should also consider the following risks of trading rubber:
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.