Will NR Futures Price Continue to Rebound?

SCI99

2020-04-27

Will NR Futures Price Continue to Rebound?

In March, NR futures prices on the SHFE kept dropping and even moved down below RMB 10,000/mt, which was a historically fresh low point. After the black first quarter, NR futures finally see the silver line behind the cloud. NR futures stopped dropping, bounced back and once again moved up RMB 10,000/mt. With the outbreak and spreading of coronavirus pandemic, the demand has shrunk severely. What’s driving NR futures’ bounce back? Is it a long-term trend or a temporary recovery? Here comes the detailed analysis.

In April, the commodity markets commonly stopped moving drop and started to bounce back. The highest rise in Wenhua CCI was 5.94%. NR futures rose by 10.32%. SCI holds that there are three factors leading to the bounce back. First, after the continuous drop in three months, NR dominant futures contracts have already dropped to a fresh low point never seen since 2008. It indicates an oversold condition before a price rally. Second, crude oil tanked in the first quarter. In early April, a meeting between Saudi Arabia and Russia was about to occur regarding the oil production cut. A bullish outlook promoted the biggest weekly rise in crude oil in history. As a result, the commodity markets stopped dropping and rebounded. Third, to stimulate demand, the country gives subsidiary for buying car and extends the period of tax reduction for new energy vehicles. Although the results of those favorable policies still need time to prove, it will surely help the market to bounce back from a low level.

In early April, RU2009 moved up and then kept fluctuating around RMB 10,050/mt. As of April 20, NR futures price index has closed at 10,385, down 0.29% from the highest point in April. RU2009 closed at 10,190, down 0.68% from the highest point in April.

A long-term trend or temporary recovery?

Now, a price bounce looks more like a temporary recovery after the price having dropped to a low level. A long-term trend will need support from the industry’s supply and demand as well as the external environment.

On the supply side, although the rubber tapping won’t start in China’s producing areas until a month later due to the drought conditions, the inventory of spot resources keeps rising, which offsets the good news from a reduction of new rubber supply. Although now only the number of warehouse receipts is impacted, the ample inventory in China still guarantees the supply side. SCI learns that the rubber inventory both inside and outside Qingdao Bonded Area has exceeded 800kt, which is the highest point since the statistics is done for this. The rubber inventory at downstream factories will sustain production for 15-60 working days. Those factories are commonly reluctant to purchase more. The inventory in Kunming is about 150kt. Dealers say that the delivery is difficult.

Market players should pay a closer look at the demand side. Although the country takes great effort in promoting the production, the resumption of work rate is only above 60%, 10% lower than the same period last year. With the escalating of overseas public health emergency, the overseas demand shrinks, which seriously impacts China’s market. All this will influence the outlook for the future market. Now, the coronavirus pandemic has forced some overseas tire, automobile or auto parts factories to shut down. China’s tire export orders have been slashed by more than 30%. Since more than 40% of China’s tires are exported, some of China’s tire enterprises choose to sell the export-oriented tires at home. Some may cut tire production to relieve the sales pressure. Thus, a reduced production or severe price competition may be seen in China’s tire market.

From the perspective of external environment, the crude oil crashed to a low level which hasn’t been seen since 2008. Although the oil production cut agreement was achieved in early April and the oil price rebounded, it only exerted limited influence due to a deep drop of demand during the pandemic. Besides, the worldwide oversupply of crude oil is aggravating. The crude oil inventory is piling up in the U.S. Market players are concerned about the negative impact of supply-demand imbalance on the market. The economic recovery will need a long period of time. Thus, the external environment looks bad.

Overall, this price rally is more like a small episode during the downtrend. High inventory and low demand are still the fundamentals of natural rubber. A turnaround won’t happen soon. Meanwhile, NR futures on the SHFE are likely to move with the commodity market. Before the demand recovers to the normal level, NR futures will fluctuate at a low level. The long-term price bounce hasn’t been formed yet. There’s risk of a second dip.

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