The Impending Commodity Crash and the Future of Natural Rubber
-- The world economy saw sky-high commodity prices as the commodity supercycle peaked out in the previous decade. Some believed that it would go on owing to reckless money printing by central banks across the globe, particularly the US. For a while, that was true. Each of the first two rounds of QE did send commodity prices soaring by more than 25%. But the time the third round was announced, commodity prices posted a decline. It started becoming clear that commodity prices cannot be driven by loose monetary policy alone.
-- The world economy saw sky-high commodity prices as the commodity supercycle peaked out in the previous decade. Some believed that it would go on owing to reckless money printing by central banks across the globe, particularly the US. For a while, that was true. Each of the first two rounds of QE did send commodity prices soaring by more than 25%. But the time the third round was announced, commodity prices posted a decline. It started becoming clear that commodity prices cannot be driven by loose monetary policy alone.
Whither Rubber ?
Almost certainly rubber prices will fall and precipitously so. But over the longer term say 3-5 years one can expect a positive feedback mechanism to work itself in.
Lower comodity prices -> Lower inflation -> Higher real incomes ->Increased savings -> Increased Investment => ->Increased Consumption =>Increased vehicular offtake => Increased rubber consumption.
But there are major negative forces that are in play like a) a huge amount of rubber area coming into production c) reduced offtake of tyres as public transportation kicks in d) technology like automated driving reduces the need for rubber tyres.
One scary prospect that lurks in the background perpetually is the prospect of the biotech / genetic revolution finding rubber substiutes or more efficient methods of producing rubber. The way technological change is accelerating this cannot be ruled out over the longer term, say 8-15 years. when we will hear the definite signs of this happening.
The only solution would be to increase efficiencies by increasing productivity. Which works out to increasing the real yield and reducing costs using newer technologies.
