Pop quiz. Of the major commodities where China is the world’s biggest buyer, which has seen the largest increase in imports so far this year?
The answer is rubber, both natural and synthetic, with imports of both up 24.3 percent in the first eight months of the year to 4.45 million metric tons, compared to the same period in 2016.
This is a higher growth rate than China’s imports of crude oil, which are up 12.2 percent, or coal (up 14.2 percent), or even iron ore (up 6.7 percent).
Unwrought copper imports are actually down 12.7 percent in the January-August period, although imports of copper ores and concentrates are higher by a modest 2.8 percent.
While detailed figures aren’t yet available for August, China’s July customs data shows synthetic rubber is performing slightly better than natural rubber so far in 2017.
Imports of synthetic rubber jumped 27.2 percent in the first seven months of the year to 2.29 million tonnes from the same period in 2016, while those for natural rubber were up a still impressive 21.8 percent, to 1.59 million tonnes.
If the world’s biggest buyer of rubber is experiencing such strong growth in import demand, the question then becomes why has natural rubber been one of the worst performing commodities so far this year.
Shanghai benchmark futures ended at 15,345 yuan ($2,336) a metric ton on Monday, down 15.5 percent from the end of last year.
The main Japanese rubber contract finished at 221.2 yen ($1.98) a kilogram on Sept. 15, a drop of 16.2 percent from the end of last year. Tokyo markets were closed on Monday for a public holiday.
The key to why natural rubber is performing so badly is to look at the supply trends, with the price action on Sept. 15 being illustrative.
The Shanghai contract fell 2.8 percent on Sept. 15, while Tokyo futures dropped 2.9 percent.
The declines came as a meeting of the top producers, Thailand, Malaysia and Indonesia, decided not to curb output of the commodity mainly used to make vehicle tires.
The top three producers, which account for about 70 percent of global natural rubber supplies, have struggled for several years to rein in excess output, generally with limited success.
Announcements of production curbs, such as in February last year when the big three said they would reduce output by a total of 615,000 metric tons, equivalent to about 6 percent of global supply, have resulted in only a brief spike in prices.
The only thing that has served to boost rubber prices is when there has been genuine concern about the outlook for supply, such as toward the end of last year and the start of this year, when heavy rain and flooding in top exporter Thailand threatened supplies.
Tokyo rubber prices more than doubled between September 2016 and the closing peak of 326.4 yen per kilogram on Feb. 14.
But the love didn’t last long as it became clear that the market would remain well supplied, with Tokyo futures sliding 44 percent from the February high by early June.
The rally in the latter part of 2016 and early in 2017 was also helped by optimism that then newly elected U.S. President Donald Trump would boost infrastructure spending, and also by rising crude oil prices amid efforts by OPEC and its allies to restrict their output.
Synthetic rubber is derived from crude oil, which thus serves as a driver for natural rubber prices as well.
The scaling back of market optimism over Trump’s presidency and the struggles of crude producers to engineer a sustained rally have also weighed on natural rubber prices.
Overall, it’s clear that even strong Chinese demand isn’t enough to overcome excess supply in the market.
Until the major producers can convince the market that they are serious about lowering output, prices are likely to struggle, with demand-led gains an extremely slow process.