Prices of latex and natural rubber have dropped in international markets.

Prices of latex and natural rubber fell sharply this week. Partly, this drop was expected due to the (delayed) start of the high production season, which was accompanied by more favorable weather. However, the weak demand from China and the actions of some investment funds also contributed. China's poor inflation data and the slowdown in automotive sales worsen demand expectations.

Meanwhile, freight rates continue to rise.

Rubber (TSR20, Bangkok, FOB)

Latex 60% (Bangkok, TH)

Chinese investment funds push prices down due to expectations of weaker demand.

According to the Japan Exchange Group, this week Chinese commodity investment funds reportedly made significant sales, unwinding a buying position of 400,000 tons in rubber futures.

According to the group's latest report, the drop in natural rubber prices is due to lower buying interest. We highlight two factors influencing the expectation of weaker demand: i) the return of deflation in China (prices fell 0.1% in May), which is a clear sign of weak local consumption; and ii) doubts about the ability to sell their automotive production due to tariffs imposed by the European Union.

At the start of the high production season, weather conditions improve for producers in Southeast Asia.

Finally, the June supply is beginning to appear, alleviating, even slightly, the shortage that has prevailed in the market in recent months. Weather reports forecast normal or slightly above-normal rainfall in the coming weeks, and overall good weather for the start of the natural rubber production season.

This could help deflate the high latex prices. 

Automotive demand is expected to slow, although it is still rising for now.

For now, sales remain in positive territory, but they are growing less and less. In May, automobile sales in China grew by 2%, a figure lower than the growth rate in April.

Similarly, in April, the European Union experienced a monthly drop of around 11% in vehicle registrations. And although the United States achieved a 9% growth in May, the pace has slowed significantly compared to the trend observed in February and March.

If the trend continues, this will impact the demand for natural rubber for tire manufacturing, which could also help moderate price increases.

Early start to the high season, early end too?

High demand is one of the factors contributing most to the rise in rates. However, some analysts see that this demand is mainly concentrated in products that will face tariff increases in the coming months (as seen in Brazil and the US).

This suggests that there could be a normalization well before the peak season ends, allowing freight rates to drop. For now, in the very short term, the market continues to see over-demand, and carriers have announced new price increases.