With prices falling almost 70% in the last five years, the natural rubber market finds itself at a crossroads. There are a number of ways the market could turn, but one thing is certain – things can’t continue as they are.
To help stabilise prices, the International Tripartite Rubber Council (ITRC) which represents the three largest rubber producers – Indonesia, Malaysia and Thailand – announced a significant squeeze on exports earlier this year.
Reducing rubber exports by 615,000 metric tons over six months could prove to be an effective short-term fix. But in the long term, more fundamental changes to how the market operates are required.
A combination of weak global demand and growing stockpiles is certainly not a recipe for a healthy market. The current models must evolve or traditional market operators will find themselves replaced by new, technology-enabled entrants who can offer the dynamism and flexibility the market so badly needs.
Three ways to evolve a commodity market
Changing the business model of an entire commodity market isn’t something that can happen overnight. But a step-change approach can reduce risk and increase adoption while evolving the market over time.
As with any industry, digital technology has a key role to play in unlocking the value of the rubber market, and three tech-driven developments stand out as potential ways to make improvements.
1: True price discovery
The current method of pricing most rubber sales is likely to be a contributing factor to the market’s low prices and poor liquidity. A better price discovery platform is needed to connect buyers and sellers.
That’s why the ITRC soft-launched the Regional Rubber Market (RRM) earlier this year. The RRM aims to stabilise rubber prices and improve liquidity by providing an open forum for producers to sell and one in which buyers can have confidence in pricing transparency. The ITRC hopes this will become a trusted platform for true price discovery, enhancing the performance of the market as a whole and benefiting all participants, from producers and traders to financing banks and consumers.
2: Online warehouse receipting
With price pressure and stagnant liquidity in the rubber market, participants are also looking for ways to reduce their risk exposure. One way to help achieve this would be to replace today’s manual documentation with a standardised, structured approach based on electronic documents.
A standardised electronic receipting platform, for example, would give market participants ready access to traceable warehousing information, offering the potential to enhance liquidity in a number of ways. Increased confidence in warehousing could encourage buyers and financing banks to participate in the market, and it would also offer opportunities to manage and collateralise growing inventories more effectively.
It’s an approach that’s already working in other markets. The London Metal Exchange’s LMEshield, for example, now provides centralised issuing and management of electronic receipts for commodities stored in as many as 30 legal jurisdictions, with the aim of improving confidence in warehousing and expanding the commodities financing market. Of course, while technology is the enabler, such an approach depends heavily on the legal framework which underpins the rights to title and ownership of goods.
3: A physical exchange
In September 2016, Straits Financial Group announced it had been awarded a license to operate a physical commodity exchange in Indonesia.
The physical exchange, to be called Asia Commodity Marketplace (ACM), will provide an electronic platform for direct transactions between local producers and global market participants, with transactions settled thorough a dedicated clearing house, also operated by Straits.
By connecting buyers directly to producers (and providing a clearing counterparty to mitigate transaction risk), ACM hopes to create a more dynamic ecosystem for the region’s physical commodity markets, including rubber.
As Jeremy Ang, Global CEO for the Straits Financial Group says, “ACM has the potential to develop… a more competitive and prevalent trade financing industry in Indonesia, through efficient price discovery, trusted quality standards, and credible collateral management.”
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For a deeper dive into the current state of the rubber market and the opportunities available as it evolves in the future, sign up to read our white paper, Unlocking the Rubber Economy.