Workers at a rubber-processing plant in Chengmai, Hainan province. China's demand for natural rubber may drop in 2012 because of an economic slowdown and predicted sluggish vehicle sales. [Photo / China Daily]

Weak economies across the world will face greater downward pressure in 2012

BEIJING - Demand for natural rubber in China, the world's largest consumer, may slow in 2012 and prices may extend the biggest annual decline in three years as economic growth and auto sales ease, said an executive at Okachi & Co.

"There's growing concern that the whole economic situation will face downward pressure in the first quarter next year because of weak economies in both emerging and developed countries," said Lizhi Tang, president of Okachi's greater China region. Okachi is the largest broker for rubber contracts on the Tokyo Commodity Exchange.

Slower demand may extend a 33 percent decline in prices this year, the biggest drop since 2008, amid higher supply from producing countries including Thailand, and as the sovereign debt crisis in Europe deepens and growth in the United States slows. China accounted for about 34 percent of global demand last year, according to the International Rubber Study Group.

"Growth in China's demand for natural rubber next year is poised to slow down amid sluggish new auto sales," Li Shiqiang, general manager at Sri Trang (Shanghai) Ltd, a unit of Thailand's largest publicly traded rubber exporter, said on Dec 22.

China's economy is forecast to grow 8.5 percent next year, the least in 11 years, according to the Organization for Economic Cooperation and Development. Vehicle sales may rise by the least in 13 years in 2011, plunging from last year's record 32 percent, according to the China Association of Automobile Manufacturers, as inflation, higher interest rates and the end of a two-year stimulus plan deter purchases.

The June-delivery rubber contract dropped to as low as 275.1 yen a kilogram ($3,527 a metric ton) before trading at 276.6 yen on the Tokyo Commodity Exchange.

"Chinese tire makers are confronting problems such as tight cash flow, declining sales, overcapacity, pressure to lower tire prices and consolidation," said Sri Trang's Li. "Their situation will only improve if the whole economy turns up and the auto market recovers."

Shares in Giti Tire Corp, China's largest tire maker, have dropped 30 percent this year in Shanghai and those of Double Coin Holdings have plunged 42 percent as auto sales have slowed.

"Next year it's likely that supply will outstrip demand because of a slowdown in the global economy and the subsequent weak demand from the auto and tire sectors," said He Yihua, a trading manager at Okachi.

The increasing use of substitute synthetic rubber will also lead to reduced use of the natural product, said He. Synthetic rubber may have reduced natural rubber consumption by about 545,000 tons in 2011, he said.

"The weak fundamentals in the real estate market and other infrastructure sectors will also reduce the demand for tires in the logistics chain," according to Sri Trang's Li. "So far there's nothing to be optimistic about in 2012."

China's home prices posted their worst performance this year with more than half of the 70 biggest cities monitored in November recording declines after the government reiterated plans to maintain property curbs.

Inventories at bonded areas in Qingdao, the country's biggest spot-rubber trading hub, climbed to between 270,000 tons and 280,000 tons last month, signaling sluggish demand, Okachi's Tang said.

Natural rubber prices may fall further in the first quarter as the producing countries raise production, Tang said. Any "meaningful" rebound may appear in the second or the third quarter when producing countries may take measures to stem a decline in prices and a less restrictive monetary policy in China may stimulate the economy, said Tang.

Bloomberg News