Although inflation pressures ease as commodity prices retreat, they show signs of becoming a longer-term presence in China as Chinese workers and others in emerging markets win higher wages and become enthusiastic domestic consumers. For years, U.S. consumers purchased cheap imported goods—partly because the Chinese currency was kept undervalued. This led to large U.S. trade deficits.
Most economists agree the U.S. should consume fewer goods from abroad and ship out more American-made goods. The upward drift in the price of imported goods will make this happen.
Currencies play a key role in the price of commodities. Washington has long pushed China to let the Yuan appreciate and to encourage domestic consumption. The Yuan is up 28% against the dollar in six years. The weaker dollar helps U.S. exporters, but the stronger Yuan and higher costs within China from domestic demand press upward on the costs of goods for U.S. shoppers.
The U.S. decreased the number of oil barrels imported in April to 243 million (roughly 10%), due to increasing oil prices and weak U.S. demand. The quantity of oil imports has moved downward since 2005 with the expectation of this trend continuing. The high price of oil lowers oil consumption while also increasing oil production. These events will lead to fewer imports and lower fuel prices.
The Association of Natural Rubber Producing Countries forecasts 2011 global production of natural rubber to beat its initial estimate by 8%. Along with this increase in supply, natural rubber demand will subside due to auto production setbacks in Japan and decreased demand for automobiles in China. Further, China's fiscal tightening, which will likely continue along with most developing countries, will cause rubber prices to decline as the speculative demand for rubber subsides. There is also a strong possibility of further reserve ratio hikes in China, which hampers economic growth.
On the supply front, natural rubber trees were planted in large scale in both 2006 and 2007. Once planted, it takes approximately 6 to 7 years for rubber trees to begin producing sap. Supply is therefore inelastic in the short–term and will be limited until 2013. It is estimated that newly planted acreage of natural rubber trees totals in excess of 1 million hectares. According to the International Rubber Study Group (IRSG), global natural rubber output is expected to total 10.83 mm tons, (up approximately 5% year-over-year). Although helpful in the short-term, long-term supply will not increase markedly until 2013.
Impacting demand for natural rubber, in 2011 China's auto sales growth is expected to decline year-over-year. First, China cancelled the purchase tax preferential policy and the car subsidy program for rural areas. 70% of the global rubber supply is used for tire production. According to IRSG, although the total global production of tires is expected to increase year-over-year by 7.6% in 2011, it will be down from the 19.8% growth rate experienced in 2010.
Over the past several months, natural rubber prices have soared due to oil price hikes, the weakening U.S. dollar, and excess liquidity. Given that GDP growth is declining in Europe, Japan, China and the United States, the demand for natural rubber will continue to decline in the short run. Also, as the price of latex gloves increases, the substitution effect causes the demand for vinyl and synthetic gloves to increase.
According to the Malaysian Rubber Board, latex prices typically track crude oil prices. Given the current supply and demand environment for oil, crude oil market prices should be between $75 - 85 per barrel. Hence, based upon a moderation in crude oil prices and all of the above factors, we believe that latex prices will moderate or, in the worst case, remain flat for the balance of the year.
Nitrile butadiene rubber (NBR) now constitutes 68% of total synthetic rubber consumption worldwide. By comparison, in 2005 synthetic rubber consumption was 44%. As the demand for NBR has soared, a large percentage of this increase is attributed to the production of NBR (nitrile) gloves. Roughly 60% of the material used to make nitrile gloves is butadiene.
Although natural rubber gloves have been touted as the preferred choice for the medical industry due to better elasticity (which leads to a better fit), cheaper average selling prices, and a stronger demand profile, the demand for nitrile gloves has been rising. However, according to the Malaysian Rubber Export Promotion Council, exports of synthetic gloves to the U.S., the European Union, Japan, Canada, Australia, China and Brazil grew by 58% year-over-year in 2010, compared to a decline of 2.3% year-over-year for latex gloves. High latex prices have made nitrile gloves cheaper, and hence, more attractive. Nitrile glove production techniques have advanced, helping to close the quality gap with latex gloves. Next, there is the continuing concern of latex allergies, as well as the increased marketing efforts of glove resellers in the U.S. promoting nitrile gloves. Given that nitrile prices have historically been more stable than latex prices, glove manufacturers can better protect margins by controlling their inventory costs using NBR.
Supply issues are negatively impacting nitrile glove prices. Essentially, nitrile gloves are derivatives of oil. Raw material cost increases (notably oil), transportation and fuel surcharges have risen dramatically in the past six months. Given the increase in NBR demand, manufacturers have experienced raw material shortages. Japanese manufacturers were also impacted by the recent earthquakes in Japan. We see continuing nitrile glove price increases in the near term.
High oil prices negatively impact petroleum-based vinyl gloves. This year, vinyl costs rose nearly 25%. With the continuing high cost of oil and a shortage of synthetic materials, vinyl glove prices are up on average 10% to 15% a case. Disposable glove consumers have increased their overall demand for vinyl as latex and nitrile glove prices have continued to outpace vinyl glove prices. By trading down to vinyl, this substitution effect puts upward pressure on vinyl prices and will continue to do so in the near term.