Rubber prices are expected to strengthen again

27 Nov.2020

Benefiting from the continuous recovery of domestic and foreign economies, in October, China’s manufacturing purchasing managers’ index was 51.4%, which is 0.1 percentage point lower than that in September, but has been continuously above the critical point since March, indicating that the manufacturing industry is showing a continued recovery trend . At the same time, in October, the Caixin China Manufacturing Purchasing Managers Index was 53.6, up 0.6 percentage point from September, and the highest value since February 2011, indicating that the manufacturing industry's prosperity has improved significantly.

Although strong demand has accelerated the recovery of production, and the production index has been in the expansion range for eight consecutive months, it is necessary to be vigilant that the expansion of external demand has slowed, and repeated overseas epidemics have a relatively obvious inhibitory effect on external demand. On the whole, October PMI declined slightly due to seasonal effects, but the decline was weaker than in previous years, reflecting that the momentum for economic recovery still exists. Based on the optimistic macro outlook, after a sharp correction in the early period, the rubber futures 2101 contract is expected to stop falling, and the enthusiasm for long-term is expected to reignite.

Affected by the epidemic and extreme weather, the opening of domestic natural rubber production areas this year has been significantly delayed. Although the output of new rubber rebounded rapidly after the resumption of rubber tapping, the production decline caused by the lost two months of rubber tapping time could not be compensated by the remaining rubber tapping period. The annual reduction in production was almost a foregone conclusion. According to statistics, in September this year, the domestic natural rubber output was 111,400 tons, although an increase of 11.4% month-on-month, it fell 2.7% year-on-year. In addition, from January to September, the total domestic production of natural rubber was 426,500 tons, down 19.4% from the same period last year. Since October, the main production area has entered the peak season for rubber tapping, but Hainan has encountered typhoons one after another, and the release of new rubber production capacity has been limited. In mid-to-late November, the Yunnan production area will enter the seasonal stop period, and Hainan will also stop in mid-December, which means that the domestic supply of all latex will become more tight in the later period.

Turning to overseas, although the opening time of Southeast Asian production areas is normal, due to the heavy rain this year, the tapping operation has been affected, and the output of raw material glue has declined. The International Tripartite Rubber Council predicts that natural rubber production will decline in the rest of this year, and the decline in production will continue until the beginning of next year. At the same time, it is expected that the production of natural rubber in Thailand, Indonesia and Malaysia will decrease by 859,000 tons from 8.79 million tons last year. The latest report of the Association of Natural Rubber Producing Countries (ANRPC) shows that in September, the output of natural rubber in the main producing country in Southeast Asia was 1.0493 million tons, a year-on-year increase of 5.2% and a month-on-month increase of 2.68%. However, the total output of natural rubber in the region from January to September was 7.7971 million tons, a year-on-year decrease of 7.3%. Among them, Thailand decreased by 2.04%, Indonesia decreased by 13.18%, Malaysia decreased by 11.54%, Vietnam decreased by 5.06%, and India decreased by 3.31%.

Overall, under the influence of the epidemic and weather, the decline in natural rubber production at home and abroad this year is a foregone conclusion. The tight supply in the rubber market is expected to exist in the long-term, and the quotation of glue raw materials remains strong.

Domestic new car production and sales are booming, heavy truck sales continue to "blow out", and China's tire supporting market has performed well, driven by the continued recovery of the automotive market. Last year, my country’s tire exports accounted for 41%, replacements accounted for 37%, and original car tires accounted for 22%. It can be seen that the improvement of the tire market needs not only the cooperation of the internal supporting market, but also the support of overseas demand. With the continuous recovery of my country's economy and overseas economy in the third quarter, not only the domestic sales of tires are active, but also the tire foreign trade orders have recovered significantly. The latest data from the General Administration of Customs shows that since the third quarter, domestic tire export orders have resumed growth, and factory operating rates have increased significantly. Among them, in a single month in September, domestic rubber tire exports were 650,000 tons, a month-on-month increase of 20,000 tons, a year-on-year increase of 16.7%; in the first nine months of this year, domestic rubber tire exports totaled 4.49 million tons, which was down 8.5% year-on-year, but compared with the previous In 8 months, it rebounded 3.2%. In addition, in the first nine months, the cumulative output of domestic tires was 583 million, down 5.5 percentage points from the same period last year. This was mainly because the domestic and foreign outbreaks in the first half of the year had a greater impact on my country's tire production and exports.

With the improvement of domestic sales and foreign trade, the operating rate of domestic tire companies rebounded significantly in the third quarter and exceeded the level of the same period last year. According to statistics, as of the week of November 13, the operating rate of domestic tire companies for all-steel tires was 75.26%, an increase of 8.06 percentage points from the same period last year; the operating rate of semi-steel tires was 71.03%, an increase of 3.92 percentage points from the same period last year. Entering the fourth quarter, there was a second counterattack against the epidemic in Europe and the United States, and demand for overseas orders may be affected. However, the Democratic Party Biden has an advantage in the US general election. It adheres to the concept of globalization and faces the severe reality test of the US epidemic. The Sino-US trade friction is expected to be temporarily eased, and my country's tire export pressure to the United States is expected to reduce.

Overall, in the future, domestic tire demand is expected to continue to be strong, driven by foreign trade orders and supporting markets. Although facing uncertain risks such as external epidemics, domestic tire companies will maintain a relatively high operating rate for a long time.

As we all know, in the domestic market, natural rubber is mainly used for tire production, and the strength of tire demand depends on the prosperity of the terminal car market. Affected by the new crown pneumonia epidemic, my country's new car market once saw a cliff-like decline in production and sales. According to reports, from January to March this year, my country's new car sales grew at -20%, -78% and -40% year-on-year. With the active advancement of the resumption of work and production, the demand for family car purchases and car replacements has been released, and the year-on-year growth rate has changed from negative to positive. In April, it ushered in positive growth, and in May, both the month-on-month and year-on-year growth. In the second half of the year, new car production and sales continued to be optimistic.

According to data from the China Association of Automobile Manufacturers, in September, my country's automobile production and sales continued to show double-digit growth, and the cumulative decline in production and sales narrowed to less than 5%. In addition, in October, the production and sales of automobiles completed 2.552 million and 2.573 million respectively, an increase of 0.9% and 0.1% from the previous month, and an increase of 11.0% and 12.5% from the same period last year. So far this month, automobile production and sales have increased for 7 consecutive months, and sales growth has remained above 10% for 6 consecutive months. From January to October, the production and sales of automobiles were 19.519 million and 19.699 million respectively, down 4.6% and 4.7% year-on-year, respectively, and the rate of decline was 2.1 and 2.2 percentage points lower than that from January to September.

In the terminal retail sector, the peak season of "Silver Ten" is highlighted. Benefiting from the increase in manufacturers' support policies and the release of policy dividends in various regions, the auto market continues to improve. However, near the end of the year, manufacturers’ task indicators were too high, the inventory pressure was severe, dealers’ inventory pressure increased, and the return of funds was slow. According to the latest issue of "China Automobile Dealers Inventory Early Warning Index Survey" VIA of the China Automobile Dealers Association, in October, the automobile dealer inventory early warning index was 54.1%, an increase of 0.1 percentage point from September and a decrease of 8.3 percentage points from the same period last year. The inventory warning index is above the ups and downs line.

On the whole, the domestic auto market production and sales in the fourth quarter are expected to continue the good performance of the third quarter, and the growth rate will be further expanded. The prospects for the recovery of the industry are bright.

Benefiting from the continuous recovery of the domestic economy after the epidemic prevention and control, logistics has become more active. In October, the prosperity index of China's logistics industry maintained a high rebound trend, and the growth rate was stable. According to data from the China Federation of Logistics and Purchasing, in October, the prosperity index of China's logistics industry was 56.3%, up 0.2% from September. The sub-indices show that in October, the new order index was 56.7%, up 0.8 percentage points from September, indicating that logistics demand is still strong.

With the growth of logistics demand, heavy trucks, the main tool of logistics transportation, will naturally benefit. Data shows that the sales of heavy trucks, which are a barometer of natural rubber demand, showed a high growth momentum in the third quarter, and continued to be optimistic in the fourth quarter. In October, my country sold 129,000 heavy trucks, an increase of 41% year-on-year, which not only broke the historical sales record for the same period, but also set a new monthly sales high for the 8th time this year. From January to October, my country's cumulative sales of heavy trucks reached 1.365 million, a year-on-year increase of 39% and a net increase of more than 380,000 vehicles. Under the environment of economic internal circulation and the continuous force of the National III phase-out policy, the sales of heavy trucks are expected to maintain high growth in the remaining two months of the year, and the cumulative sales of the year are expected to exceed 1.55 million.

Since the beginning of this year, the Shanghai Futures Exchange's standard delivery product full latex has severely reduced production. There are two reasons behind it: First, although Yunnan and Hainan are in the peak season for rubber tapping, the phenomenon of insufficient glue purchase exists; second, concentrated latex has a price advantage than full latex. Processing plants are more willing to process the acquired glue into concentrated latex.

According to statistics, as of the week of November 6, rubber futures stocks were 253,537 tons, and registered warehouse receipts were 225,000 tons, a decrease of 48.34% and 50.72% from the same period last year, and a decrease of 51.56% and 50.30% from the 3-year average. Due to the small amount of newly registered warehouse receipts this year, after the centralized cancellation of the old warehouse receipts in November, the new warehouse receipts were only more than 40,000 tons, and the delivery source was insufficient.

Vaccine development has made breakthrough progress, domestic and foreign economies will continue to recover, the macro atmosphere will warm up, and the global financial market risk appetite will steadily increase. In the context of global natural rubber production reduction and optimistic downstream demand, rubber prices are expected to strengthen again in the future. The 2101 contract rubber futures price is expected to operate in the range of 14,000-16,000 CNY/ton. Therefore, it is recommended to build a bull market call option spread strategy on the 2101 contract.

Disclaimer: ECHEMI reserves the right of final explanation and revision for all the information.