Rubbing Along

The price of rubber has been on a wild ride over the past 5 years, as can be seen within the first chart, which is the Yen price of Rubber quoted on the Tocom futures exchange. After falling by 70% during the 2008 rout, the price soared four-fold over the next couple of years, only to collapse by 55% since its February 2011 high, returning to the same price as 7 years ago.

 

weekly_blog_130620_1

 

So what gives?

Well, we are aware that the commodities have been trending lower since the mid-2011 highs, but thought that it may be interesting to look at car sales, as car tyres are perhaps the most important end user of rubber.

weekly_blog_130620_2

 

As the EU 27 new car registrations for May was due for release this week, we’ve used the monthly data for this, shown in blue and shown the rubber price in Euros to try and make any comparison “like for like,” albeit that only 17 of the EU members use the Euro. Either way, one can note a reasonable correlation between the two, from where we can note a couple of observations:-

  • New car registrations collapsed in the wake of the 2007 financial crisis and then soared thanks to the one-off “cash for clunkers,” tax-payer funded stimulus provided in 2009. Once the stimulus was withdrawn, new car registrations have fallen once more, with May’s reading showing a 5.9% fall year on year.
  • With a “lag” the one-off stimulus spiked the price of rubber to that all time high and you can note a continued correlation between the Rubber price and new car registrations, with both trending lower.

Autos and tyres are discretionary items and discretionary spending continues to be under pressure, with debt-laden European economies unlikely to provide any repeat of that earlier stimulus.

Adding to the mix, Rubber supply has exceeded demand for three years now, with the surplus expected to expand by 57% this year, according to a recent Bloomberg report. China is the key player in this, as 33% of global demand derives from China with tyres representing 70% of that rubber demand.

In summary, the free dictionary defines “rubbing along” as “to apply pressure and friction or to manipulate pressure and friction.”

You could fit the words trade, stimulus and subsidy into this and suggest that the world is not exactly rubbing along to the extent that policymakers would have you believe.

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