Ever heard of a super trader? That person may be the reason rubber prices are so high.
There is a little-known phenomenon in the rubber-growing belt of south-east Asia, whereby a few individuals can, in a coordinated manner, manipulate the price of NR.
They are the super-traders. But they do not inhabit the trading floors of Shanghai, Singapore and Tokyo. Instead, they inhabit the plantations and smallholdings around the rubber groves.
Like a Western loan shark, a supertrader's agent will go to a smallholder and give him a cash advance. The smallholder needs a new motorbike? Ask the agent. Need school fees? Ask the agent.
In exchange for this cash advance, the small holder has to deliver a certain amount of cup lump over the next week or two.
It's an attractive deal for the smallholder. Instead of having to tap each day and take the cup lump to a processing plant, the super trader comes to his door, gives him an advance and then arrives to collect the rubber a few days later.
Seems simple and innocuous enough, until you start to understand the scope and scale of the supertraders.
A single super-trader might use a few hundred agents, each going around a village or two.
The trader can then buy up the cup lump, hang on to it for a week or two, until prices have risen, and then sell. He makes a healthy profit.
Even this would not be too bad, but when you realise that these supertraders co-ordinate activity across regions, and throughout Malaysia, Thailand and Indonesia. Then the magnitude of the problem starts to take on a new meaning.
Imagine a few dozen individuals, each of whom has hundreds of agents buying up cup lump. Storing that lump in warehouses of 10 000 tonnes a time, keeping the processing plants short. And then think that these individuals all hold on to just enough of their rubber with the deliberate intent of driving prices higher.
Those processing houses know all about the super-traders. But there is nothing they can do because – in Malaysian law – they are forbidden from going to the smallholders. Unfortunately for them, most of the professional processors have struck long-term deals with the tyre makers. And if they cannot get the rubber at the farmgate, then they have to go to open markets and pay a premium, in order to fulfill their supply contracts.
So they have to pay premium rates to get the rubber to pass on to the tyre makers. That pushes up prices and the super traders have won.
Worse, the processing houses receive second-grade rubber contaminated with soil, stones, and other material which increases the weight of the goods sold. That adds a processing step and an expense to the processors operations.
The super traders monitor the price and release enough rubber to keep the market short, but not too short and keep driving the prices higher. They can buy low and sell high. A classic winning strategy for a trader.
However, in most open markets, trading is transparent and free. In this new market, the trade is completely controlled by a few, well-coordinated individuals.
Highly co-ordinated supertraders are a new phenomenon. It appears that they emerged first around the start of 2008. Few in the NR sector understood the sharp rise in prices in the first half of 2008. We, in the trade, put it down to demand and weather and other factors, In fact, it seems it was the super traders first starting to appear.
Prices collapsed in late 2008, with the western recession. But the super traders had learned how effective and profitable their strategy could be. And I think they are now manipulating the supply of rubber to global markets, affecting the global price.
I'm not sure anyone in the NR trade has a good explanation of why prices are so high. We mutter about floods and drought and El Nino and unprecedented demand from China, but in our hearts, we know these are merely contributory factors. They do not explain the impossibly high prices.
The evidence for that is that the big processing houses across the rubber growing belt are getting less rubber than they need or expect. Factories which should be converting cup lump to SMR 20 are lying idle, because they do not have the rubber to process. This is not a symptom of over-capacity. It is a symptom of under-supply. But the trees are still there and they are still being tapped.
It's just that the super-traders are hoarding the material, keeping the market short.
We know that Indian smallholders routinely withhold their rubber from the markets over timescales of a few weeks in the hope of increased prices, but because these smallholders do not act in a coordinated way, the effect is small.
Once the price reaches a certain level one or two of the smallholders will go to the market and sell, this drives the prices down, which leads to more selling by other smallholders and this drives the limited rising and falling markets in India.
What seems to be happening across South East Asia is that these supertraders have taken the Indian model to a much higher level, with up to a million tonnes of rubber stored and are acting in a coordinated way to drive prices higher. When they agree to hold on to the rubber, and no-one blinks, the price is driven inexorably higher.
Until a few weeks ago, I had never heard of a super-trader. I did not know of the phenomenon. You only learn about it if you are on the ground among the rubber groves, asking smallholders if they have material to sell.
Fewer of us are doing that nowadays, as the old hands of rubber purchasing retire, while their successors increasingly inhabit air-conditioned offices and trading screens.
And that has given the super-traders an unrivalled opportunity to exploit our vulnerability.
To be honest, I am not sure there is much we can do about it. It seems, however, that this offers some kind of explanation of the increasing prices, which I had never heard before a few days ago.
If you have comments, contact me at dshaw@crain.com
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