By Rutam Vora (Commodity Online)
AHMEDABAD : The much debated issue of the continual rise in natural rubber prices, for which futures trading is being blamed by a section of industry, seems to be reaching at an agreeable level, where the industry would be given a consultation to understand benefits of forward trading and managing their price risks.
Ahmedabad-based commodity bourse and only exchange in India to be operational in natural rubber futures trading, National Multi-Commodity Exchange (NMCE) will be arranging a national consultation seminar for the rubber consumers, so as to make them aware of the benefits of futures trading.
The exchange officers found widespread misconception about the connection between price escalation and futures trades in natural rubber. In an interaction with Commodity Online, Anil Mishra, CEO, NMCE said, “We had meetings with management committee members of All India Rubber Industries Association regarding the price issue. We explained them about the benefits of futures trading by hedging their risk. They seem to be convinced with the logic of forward trading. Now, they have asked as to arrange a consultation program for the members of the association during this month.” NMCE is arranging such consultation programs in Jalandhar and Delhi during this month.
Recently, Indian tyre industry had written to the prime minister seeking a ban on the futures trading in rubber and allowing imports duty-free. Natural rubber prices have touched an all-time high of Rs.155 per kg, primarily due to short supply in the global market. In India during crop season 2009, rubber production remained at 820,000 tonnes, which is about 9% of the total world production. Against this, India’s total rubber consumption stands at about 880,000 tonnes, leaving a gap of about 60,000 tonnes.
But reports indicate that key rubber cultivating countries including Thailand, Indonesia and Malaysia has faced unfavourable weather conditions last crop year, which resulted in the reduced availability of natural rubber. The three countries contribute over 75% to the total global rubber production.
Looking at the recent price structure, rubber prices have remained higher across all major exchanges, where rubber is traded in futures contracts. April series of rubber contract hovered at the top end on Shanghai Futures Exchange (SHFE), while prices on other exchanges like, Singapore Commodity Exchange (SICOM), Tokyo Commodity Exchange (TOCOM), NMCE and Thailand’s AFET, remained relatively lower and almost matched with each other.
However, the industry goes on arguing that prevailing and emerging scenario of natural rubber is a matter of alarming concern for domestic tyre industry and in turn for the entire road transport sector. Even at these high prices, natural rubber is in extreme short supply. The tyre industry’s central body, Automotive Tyre Manufacturers’ Association (ATMA) went on to say, in its representation to the prime minister, that the growers are hoarding rubber and not selling in anticipation of daily price increase of Rs. 2-3 per kg, which is seen happening on the futures trading.
ATMA has sought a reduction in the import duty on natural rubber from the existing 20% to 7.5%, besides the association has also sought a temporary ban on futures trading in natural rubber, which according to ATMA, is fuelling speculation.Ruling out ATMA’s allegations of undue speculation happening in futures trades of natural rubber, Mishra mentioned that futures trading was essentially designed to provide benefits of price protection for traders and price discovery for producers. “The exchange cannot be held responsible for speculative trading, which, otherwise, already existed in the market. This (futures trading) would help them hedge their risk and gain benefit from the prevailing prices. Even small players can take advantage of it, since a significant volume of 33-40% of the total rubber consumption goes to these small industries in India,” Mishra said.
However, not many small players actually take active participation in futures trading since it remains grossly an alien science for most of them. “There are different objective for everyone to trade in the futures market. A hedger would have his own motive for trading, buyer will have his own objective and the speculator would have his motive. It becomes a problem when one gets into trading with an objective other than his own,” Mishra explained adding that almost all rubber consuming countries are facing the similar situation of price rise.
But as far as futures trading is concerned, Mishra made it clear that in India, NMCE has one of the highest open interests, which shows actual pending buying position. As on April 1, 2010 NMCE had open interest of about 159% of the total trading volumes, which hints at a huge demand in future. Secondly, on Shanghai’s SHFE open interests remained almost 4% of the total volumes, which according to experts shows higher possibility of speculative trading.
As long as demand for reduction in import duty is concerned, market analysts suggest that looking at the global shortage of natural rubber, imports would not yield much benefit for the country. On the contrary, importers might end up paying more than the prevailing market price in India; hence there is not much incentive for importer.
Looking at the current situation and considering the upcoming lean period for rubber production during April to June, the price situation is feared to worsen further. But with newer rubber planting locations emerging in the north-east region of India, industry is hopeful for favourable situation in supply and prices.
(commodityonline.com)
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