Thai natural rubber production has become less sensitive to high raw material prices but increasingly sensitive to abnormal weather. This indicates serious issues with Thailand's production capacity—problems that are escalating year by year. Consequently, even if weather conditions improve temporarily—causing both raw material and futures prices to fall in tandem—the long-term state of high weather sensitivity remains unchanged. This implies that future scenarios where supply fails to increase as expected are likely to recur.
Geopolitical conflicts in the Middle East during the first half of the year caused crude oil prices to fluctuate wildly, with the chemical sector following suit. As these geopolitical factors persist into the second half of the year, rubber prices are expected to maintain a generally strong trend, suggesting that significant price drops may present buying opportunities. Whether the production capacity cycle has turned is the decisive factor in whether high prices will stimulate supply. The lower the sensitivity of production to price, the less resistance there is to upward price movement. In other words, the greater the confidence that the capacity cycle has shifted, the higher the probability of a bull market emerging in the second half of the year.
For over a decade, natural rubber prices remained persistently weak, primarily because Thai production was highly sensitive to raw material prices. Whenever futures prices rose due to bullish factors, the resulting high prices would stimulate a surge in supply; this increased output would subsequently drive futures prices back down—often to new lows—creating a sustained bear market. However, since 2024, Thai raw material prices have frequently remained at high levels for extended periods. These persistently high prices reflect a supply side that often fails to ramp up volume, indicating that high prices no longer easily stimulate supply—signaling a decline in production's sensitivity to price.
On the other hand, the market often attributes low production levels to weather disruptions caused by factors such as El Niño or abnormal rainfall. Yet, a review of history clearly shows that abnormal weather is not uncommon in Thailand and that weather's long-term impact on prices is inherently limited. For instance, in January 2017, Thailand experienced heavy rainfall and flooding that not only disrupted tapping operations but also washed out roads and hindered logistics and transportation. Logically, production usually declines as the tapping season draws to a close in February; however, the drop in January output drove up raw material prices, which in turn triggered a sharp rebound in February production, resulting in no significant overall decline for the first quarter. This suggests that the impact of weather on production and prices is generally short-lived.
In contrast, over the past three years, various weather-related factors have driven significant price surges while consistently suppressing production volumes. This demonstrates that current production levels have become highly sensitive to weather conditions. Taken together—reduced price sensitivity of production alongside increased weather sensitivity—this strongly indicates severe and worsening production capacity issues in Thailand, serving as the most direct evidence of a shift in the production capacity cycle.
Historically, during the bull markets of November 2016 and October 2020, "non-standard" futures-spot arbitrage trades incurred heavy losses. Yet, since 2024, rubber prices have surged repeatedly; even amidst these bull market conditions, the spread between non-standard spot and futures prices has continued to narrow, allowing arbitrage trades to remain profitable. This pattern has recurred this year: futures prices rose steadily in the first half, while the non-standard spot-futures spread contracted. The underlying reason is that for over a decade, spot prices consistently lagged behind futures—meaning futures gains far outpaced spot gains during bull markets—whereas currently, spot prices are outperforming futures. This drastic and sustained shift in a long-standing, stable pattern signals the start of a new cycle—specifically, a turning point in the production capacity cycle.
Thailand's production—showing reduced sensitivity to high raw material prices but heightened sensitivity to abnormal weather—reveals serious and escalating capacity issues. This implies that even if weather conditions improve briefly and both raw material and futures prices fall in tandem, the long-term state of high weather sensitivity in production remains unchanged; consequently, we can expect recurring instances where supply fails to increase as expected. Meanwhile, demand continues to improve without strong macroeconomic stimulus, displaying bullish trends that exceed expectations. Rubber prices may well remain prone to rising rather than falling in the long term, making rebounds following significant drops worthy of close attention.
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