Global Report Focusing on Rubber Prices, Supply Evolution, and More

Commodity prices continue to fall. The reason? The effects of the production season are already being felt in product prices.

Meanwhile, major demanders China and the US show slight signs of deflation. For the former, it’s a sign of economic weakness, and for the latter, an indication of meeting inflation control targets.

Although the evolution of supply continues to be the main driver of price variation (the downward trend continues following the start of the production season), the main news this week has been related to the economic developments of the major global rubber consumers.

Similar Data, Different Interpretations: The Mirror of China and the United States

Latex prices (and to a lesser extent TSR20) continued to adjust downwards over the past week, maintaining the trend generated by the recovery in production.

Regarding demand, both China and the United States showed a slight monthly decline in prices. However, while in the first case this is interpreted as a weakness in consumption, in the second it’s a sign that rate cuts are near. Meanwhile, the freight market remains overheated, reaching historic demand records.

China: Lower Consumption and Expectations for the Communist Party Plenum

China’s inflation index showed a decline of 0.2% monthly (+0.2% annually) in June, below expectations. Deflation is an indication of weak domestic consumption and also a disincentive for future growth. Some companies are compensating for lower prices with salary cuts. The low demand dynamics in China have been a relevant factor putting downward pressure on natural rubber prices.

This week marks the third plenum of the Chinese Communist Party (there are usually seven plenums in each five-year period). Generally, significant economic policy changes are announced at the third plenum, which generates some expectation. However, this time it is unlikely that significant stimulus measures will be announced. The focus is expected to be on greater state intervention to boost technology-related sectors.

United States: Everything Points to a Rate Cut.

Inflation reached its lowest level in three years (-0.2% monthly, 3% annually), and all indications are that the expected rate cut will occur in September. Federal Reserve Chairman Powell hinted at this by stating that “keeping rates high for too long could jeopardize economic growth.”

A rate cut would boost commodity prices for two reasons: i) lower credit costs tend to expand global demand; ii) a lower rate implies a weaker dollar and higher prices for goods denominated in that currency.

The market tends to anticipate these effects, so part of the commodity impact was seen after the inflation data was released.