✏️ Your Guide To Investing In Rubber, An Important Commodity Used In Everyday Products
Rubber might not be a glamorous commodity, but like many others, it’s an important one since it’s used in a variety of everyday products across multiple industries. Think condoms, tyres, boots, gloves, erasers, etc. In fact, rubber is so important that it’s on the EU’s list of critical raw materials, a list of commodities with high supply risk. There are actually two kinds of rubber — synthetic and natural rubber. Natural rubber is obtained by “tapping” trees to collect the liquid latex (shown above), which is then used to make rubber. Synthetic rubber is produced using crude oil in a process called polymerisation, essentially linking oil-based compounds into long chains. We’ll be focusing on natural rubber in this article since it’s the market standard for rubber.
What Can It Do For You
🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Adding rubber to your portfolio means owning an asset that tends to act differently to other asset classes, and even to other commodities.
💰 Profit. As you can see from the price chart below, rubber prices have undergone periods of volatility, providing opportunities for speculative returns. Generally, there are a number of trends, both long term and short term, that can act as support for rubber prices. In the long term, global rubber demand is expected to continue to increase, especially in emerging economies. Since the biggest use case for rubber is tyre production, essentially, investing in rubber means betting on growing automobile demand, especially as the world slowly shifts to electric vehicles. Furthermore, nature-related events (such as climate change & disease) threatens the future of natural rubber supply, which would then lead to a shortage, pushing up prices. That being said, there are a number of risk factors that can put downward pressure on prices. These include prolonged periods of low crude oil prices, research & development into alternative sources of rubber or new materials, and a weak global economy.
What Affects Rubber Prices
There are several key factors that are involved in moving the price of rubber:
- 🇹🇭🇮🇩 Thai & Indonesian Production. Thailand and Indonesia are the world’s biggest rubber producers & exporters, as seen from the charts below. Any disruptions in supply in these countries can have an impact on prices.
- 🇺🇸🇨🇳🇯🇵 Global Demand/Economic Strength (Especially US, China & Japan). Even though China is one of the top rubber producing countries, it’s also the biggest importer of rubber. The US & Japan also represents a sizeable portion of rubber demand. It’s also important to note that a sizeable portion of rubber produced is used in tyres. Since cars are a discretionary consumer product, a strong global economy can boost demand for cars, while a weak global economy can lower demand.
- 🏛️Government Policy. Things like subsidies, tariffs, and trade policies can definitely have an impact on rubber prices. This is especially true with rubber, since both supply and demand are heavily concentrated in a few countries, so government policies in these countries can affect supply and demand levels.
- 🔄🛢️ Substitution/Crude Oil Prices. Natural rubber essentially competes with synthetic rubber. Since synthetic rubber is made from crude oil, crude oil prices impact synthetic rubber prices, which in turn, can affect natural rubber prices. For example, increasing crude oil prices makes synthetic rubber more expensive, which could boost demand for natural rubber, and vice versa.
- ☀️ Weather/Climate Change. You might be surprised to know that even rubber can be affected by weather/climate change. For example, as mentioned above, rubber production is concentrated in tropical countries. Adverse weather conditions such as heavy rain can lead to flooding, which can prevent workers from harvesting rubber, disrupting supply.
- 🦠 Diseases. In addition to climate change, disease also poses an existential threat to rubber trees. In fact, Brazil used to be the largest producer of rubber until the 19th century, where the South American leaf blight fungal disease wiped out whole plantations. Though it hasn’t appeared yet in Southeast Asia, the impact will be devastating. Put it another way, it’s analogous to anthrax to humans. Which brings us to our next point…
- 🔬 Research & Development. Research is being conducted to identify & develop alternative sources for natural rubber (one made from dandelions, and another, from another type of tree), or indeed, developing a material that’s better than rubber. Successfully boosting natural rubber yields will increase supply in the market to meet growing demand. However, should a new material be developed, it may then be a substitute, competing with natural rubber for market share, which can lower demand.
- 💵 US Dollar Strength. Although the benchmark for the pricing of rubber varies (due to a number of active exchanges in different countries), it’s important to note that the US dollars is still the world’s reserve currency. For example, if a trader were to buy rubber from the Japanese futures exchange, they might monitor the yen/dollar relationship as part of their investment decision-making process.
What Is It Used For?
Rubber is used in a variety of everyday products across multiple industries. Here are some of its uses:
- 🚗 Tyres. Tyres for automobiles, bikes, and aircraft is rubber’s main use case, due to its durability and flexibility.
- 🚗 Non-Tire Automotive Parts. On top of tyres, there are a number of other non-tyre rubber parts, like floor mats, gaskets, pedal pads, tubing, and others.
- 👟 Footwear & Clothing. Used in a variety of clothing and footwear products, such as rubber soles for shoes, wetsuits, cycling shorts, etc.
- 🏭 Industrial. These are industrial rubber products, used in things like machinery, equipment, off-road vehicles, etc. Examples include: conveyor belts, hoses, sealing products, moulded rubber goods, etc.
- 🧤 Other Products. Last but not least, rubber is used to make a number of other miscellaneous products, like surgical gloves, catheters, condoms, erasers, etc.
The Case Against Rubber
There are a couple of risks involved if you want to get involved with rubber. Firstly, since natural rubber competes with synthetic rubber, natural rubber prices are arguably linked with crude oil prices, since crude oil is used to make synthetic rubber. Though crude oil prices have somewhat normalised after its recent crash, the oil market is arguably in a state of uncertainty as oil held in storage have risen throughout the pandemic, causing fears about an oversupply in the market. The demand side is equally as uncertain, due to the potential for new lockdown measures in the future. This could mean a potential for crude oil prices to fall again, or remain in a lowered state, which means cheaper synthetic rubber, which may mean lower demand for natural rubber.
Secondly, research and development is currently being done to commercialise alternative sources of natural rubber. These include the Russian dandelion, and the Guayule tree. Successful development and commercial implementation of these plants will lead to an increase in natural rubber supply. Similarly, there are also research efforts into developing new materials that are better than rubber. This can potentially be a substitute to natural rubber, which can then lower demand.
The Case For Rubber
Firstly, like other commodities, not only can rubber serve as a portfolio diversification tool, but it can also provide opportunities for speculation and profit, as seen from the volatile price chart above. Overall, there are a number of trends, both long term and short term, that can certainly act as support for rubber prices.
In the long term, global rubber demand is generally expected to increase, especially in emerging economies. As mentioned above, the main use case for rubber is tyre production. As the world’s population grows, demand for vehicles (and electric ones) could also grow, boosting rubber along with it.
Furthermore, like many other agricultural commodities, climate change and disease poses a threat to the future of rubber. The difference is that because rubber production is highly concentrated in a handful of countries, the potential damage could be devastating, so much so that the EU added rubber to its list of critical raw materials, a list of commodities with high supply risk. As an example, Brazil used to be the largest rubber producer until the South American leaf blight pretty much wiped out most of its trees. If this disease were to hit Southeast Asia, it has the potential to wipe out most of the world’s rubber, which can dramatically increase prices. In addition to this, there’s also the effect of climate change on Southeast Asia, with excess rain and severe floods. These can definitely disrupt rubber production and supply in the market.
Popular Ways To Invest In Rubber — Pros/Cons of Each
Here are some of the more popular ways in which you can invest in rubber. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.
- Rubber ETFs. Unfortunately, there are no ETFs that invests in physical rubber, or provide direct exposure to rubber prices, but there are ETNs that invests in a range of commodities, including rubber. Because of this, on occasion, there may be times when the actual price of rubber & the price of the ETN may differ since they don’t just track rubber prices. Regardless, they’re traded on stock exchanges, so they’re pretty easy to buy and sell. Depending on which broker you go with, you may be charged with trading commissions. ETNs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Just be aware that since it’s an ETN, you are essentially buying a bond, an IOU, a debt note, and not in actual, physical rubber. Be sure to read the fine print & understand the risks and costs involved.
- Rubber Stocks. Unfortunately, there are no publicly traded rubber plantations, since most are privately owned. There are, however, a range of public companies that are involved production of rubber products, such as tyres. Because of this, you aren’t directly following rubber prices since there are other factors at play. For example, rubber prices serve as input costs for tyre production. If rubber prices increase, companies may have to increase tyre prices to meet costs, which in turn, may cause a drop in revenue, and therefore may be eventually reflected in its stock price. As always, you may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what products & assets they have, what research & development they’re currently conducting, and potential expansion plans.
- Rubber Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell rubber at a specified time in the future with an agreed-upon price. The Tokyo Commodity Exchange offers these contracts, with each representing 5,000 kg of rubber. These futures contracts are settled with physical delivery after the contracts have expired. Because you are using a significant amount of borrowed money, even small price changes in rubber can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.
TL;DR — Is It The Right Investment For You?
As always, it depends on what your aims are. Similar to other commodities, rubber can not only be used as a portfolio diversification tool, but it can also provide decent speculative returns. Overall, with a growing world population, demand for rubber is likely to increase, especially in emerging economies, via growing demand for vehicles. Furthermore, the issues of climate change and disease certainly represents existential threats to the future of rubber production. However, since natural rubber prices are somewhat linked with crude oil prices due to its use in the production of synthetic rubber, and considering the uncertain state that the oil market is in, low crude oil prices will lead to cheap synthetic rubber, which can then lower demand for natural rubber. Furthermore, research and development into the commercialisation of alternative sources of natural rubber, or new materials better than rubber, can also lower natural rubber demand.
🧺 If you are considering adding rubber to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your rubber position so you can take advantage of any volatility in the market.
💰 If you are considering adding rubber for speculation and profit, you may want to monitor the factors that affect rubber prices mentioned above. You may also want to keep track of production and consumption numbers provided by the International Rubber Consortium to identify supply and demand levels. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on rubber’s price chart to help consolidate trends and patterns to help with your decision. That being said, its price can also swing unexpectedly and dramatically, so be prepared and have an exit plan in place.
As always, if you are unsure, check in with a professional financial advisor before making any moves.