India rubber output rises under rain guard

India rubber output rises under rain guard

KOTTAYAM (Commodity Online): India’s natural production increased by 4.3% in September 77,500 tons with the rain guarding system amid moderate rainfall as compared to 74,300 tons in the same period last year, said Rubber Board of India.

However, the Board evaded divulging further details such as acreage under rain guarding rubber plantation system.

During the April-September period this fiscal, the production of natural rubber mainly used in tyre manufacturing - increased to 3.75 lakh tons from 3.48 lakh tons in the same period last year.

Total production until September 30, surged by 7.6% due to the better weather condition and the attractive prices, it said.

However, the consumption grew by 2% in the first half of the current fiscal vis-à-vis the same period last fiscal. The country consumed 4.65 lakh tons rubber in the April-September period of the current fiscal as compared to 4.56 lakh tons in the corresponding period last fiscal.



‘Tyre Cos should take charge of their own destiny’

The global rubber consumption is rising at a rapid pace with supply side being constrained on unfavourable climatic conditions, the tyre makers across the world are crying foul over the rising input costs of the key ingredient for the industry, rubber. This causes them to raise the prices of their final products thereby adding to the inflationary pressure in the economy.

Despite of this fact, not many from the tyre industry are seen taking the calculated method to recover their costs and participate in the futures trade in rubber. Grossly, industry has remained apprehensive about the futures trading in the plant crop. Contrary to that, many of the Indian players have been blaming the futures trading in the commodity as one of the key reasons for price escalation.

Considering this, India’s one of the pioneering commodity bourse and front-runner in the rubber trading, National Multi Commodity Exchange of India, (NMCE) has taken the task to clear out the misconception prevailing about the futures trading in natural rubber. Anil Mishra, Managing Director and CEO of NMCE shared his views with the CommodityOnline.com to reach out to the stakeholders in the rubber industry and explained about the benefits of the futures trading to hedge their risk.
Excerpts:

Commodity Online: Why tyre companies are not actively participating in the futures trade? Is it true that some of them believe that NMCE Rubber contract is dominated by speculators?

Anil Mishra: Even if the tyre companies were not directly buying they were indirectly connected to NMCE, because the suppliers who were short with the tyre companies were buying on NMCE to protect themselves from the risk exposure. They are quite large in number. They don’t cover all their shorts on the same day but cover at different levels, so they remain the buyers.

The speculators who think that price in future is likely to go up become the buyers; they buy on the basis of price sensitive informations after proper analysis. The hedgers who have first sold the futures in the exchange to hedge their stock become the buyer when they physically sell their goods and remove their hedges in the futures market to square their obligation with the exchange, the one who buys nearby-month and sells forward to capture the spread trade becomes the buyer.

So, in exchange there are different categories of buyers with their own logic. The tyre companies therefore should actively get involved rather than keeping away from it. They should take charge of their own destiny rather than leaving it in the hands of others.

CO: What is the misconception that the tyre companies have about staying averse from the futures trade? How is NMCE trading different from the physical trades?

Mishra: Many of the tyre companies feel that if they buy in NMCE they would fuel the price, as they are big players constituting about 60% of the total market. The truth is just reverse. If the tyre companies would buy in physical markets it gets known immediately and it fuels the price because each market centre is very small and the demand gets multiplied because same order flows through many suppliers and gets released one time.

On the contrary in NMCE it remains secret, market is national, participants are many and small size orders could be placed at different times throughout the day for 7 hours. Even if tyre companies were not buying their suppliers were buying in the NMCE future to hedge their sales position with tyre companies. His strategy is thus playing out on futures market rather than that of tyre companies.

CO: What is the need for the tyre companies to hedge on exchanges as there is a 50-50 chance of market going up or down? They would rather buy in the physical market as they do now only for daily need.

Mishra: If a tyre company buys in the physical market and later find that market is going down and it wants to sell this stock to replace with the cheaper one, they would find it very difficult to execute. Very few people would buy rubber from tyre companies in falling market; this would set panic in the market.

Whereas in futures market, they could easily sell off their position and get out of their obligation if market goes down and later on replace at lower levels. Building up or down their position was very easy in futures market. Secondly, they have to not only secure the price but also the quantity. In futures market they could easily and slowly do it in 7 hours of buying every day.

CO: How do you say exchange buying brings more efficiency in terms of pricing without affecting the quality?

Mishra: Without commodity exchanges, each tyre company has limited suppliers who are mostly traders. Price of those suppliers is negotiated one to one without big competition. The supplier has such understanding of his buyer that he builds the positions as per buyer’s business plans.

They know when the big buyers like tyre companies announce the price and quantity of purchase. In a single day, tyre companies are not able to bring down the prices even if the future prices go down.

They have to buy at one price and can’t change price many times in a day though they very much want to do so. Averaging down is not possible within a day. They have to compete with their own suppliers, who might be still short at higher levels, which they have committed.

Thus when the price in futures or international market drops it doesn’t drop in local market because their own suppliers who are short at higher level start covering at higher price.

In NMCE mechanism, tyre companies could still buy from their preferred supplier thus their quality remains good but the supplier has no role in pricing. When tyre companies actually take delivery from him that day they square their position in NMCE and pay him.

Thus, they continue to get same old price even if they paid higher price to the supplier because higher price of futures would give them profit to compensate for the loss in physical market.

More price efficiency thus comes on the exchange because they are not negotiating with few suppliers but with large number of sellers from all over the country, who could be either physical supplier or speculator or investor. The base and quality of suppliers becomes big and diversified.
CO: There has been a conception among the tyre makers about the trading and taking deliveries on the exchange. Can tyre companies liquidate their position on the exchange and not take delivery?

Mishra: Yes, they can liquidate their position on NMCE and take delivery from their preferred supplier. There is no mandatory obligation to take delivery from the exchange unless they keep their position open till delivery. The exchange is not the most efficient place for taking or giving delivery. The threat of delivery keeps the price in check, prevents squeezing and manipulation by any group and is the ideal way of settlement.

CO: Is it true that NMCE futures market would reduce the working capital requirement of tyre companies? How?

Mishra: Yes, It’s very much possible. Tyre companies can buy futures on NMCE by just paying 5% margin money, thus they could leverage their working capital requirement by 20 times.

What they secure by paying 100% in physical market, they do the same by just paying 5% in NMCE futures market. If market goes up, we credit their account every day. This is called mark-to-market.

Thus in a rising market even 5% margin money is not locked. They get cheaper rubber in rising market without having any fund locked. This is the power of financial leveraging that unfortunately tyre companies are not capturing.

CO: Some tyre companies say that they don’t buy in the morning but only in the afternoon or evening, why should they trade on NMCE in the morning?

Mishra: A good and skilled buyer should never be predictable like this. Their own supplier would buy at lower level in first half and let the price go up so that in second half they are able to sell to tyre companies more expensive. Buying secrecy is the key to enable you to buy cheap. Your objective should be buying cheap be it morning or evening it doesn’t matter.

CO: Does NMCE have any link or relationship with TOCOM in terms of prices?

Mishra: NMCE is more regulated than TOCOM in terms of Daily price range and open interest. Normally, there is good correlation between the two but TOCOM is more volatile and higher than NMCE most of the time. TOCOM is more influenced by the Crude price and dollar-yen currency strength, whereas NMCE is more on fundamentals of India. Speculative element is very little.

CO: Through your Cargill experiences tell us how could the consuming industry like tyre companies control their buying price?

Mishra: Big companies like Cargill give the buyers i.e. consuming industry the option to fix their buying price on the commodity exchange whenever they want. Normally, they fix the price in the dropping market. This is called differential contract. The premium or discount over the exchange price. They can slowly demand their suppliers to give to them the differential contract on NMCE.

Thus, between tyre companies and their supplier only differential is negotiated absolute price is decided by tyre companies which they pick up on the exchange like NMCE secretly any time of the day whenever market is dropping for whatever reasons. Their buying on exchange thus remains secret and the supplier doesn’t know.

Most of Cargill’s global buyers use this route to cover their raw material purchase which has proved to be the best method of purchase over many decades. We were supplying to big global clients like Nestle, Kraft Foods, P&G, Sara Lee, Tchibo, etc on this basis.