Extracting value from natural rubber trading markets

Optimizing Marketing, Procurement and Hedging for Producers and Consumers


Natural rubber trading - a c. 50$bn. market in 2013 - has been historically centered around Asia Pacific, which constitutes c.70% of global natural rubber consumption, with the ASEAN region alone accounting for c.75% of global production and c.87% of global exports in 2013.

This report highlights the main dynamics of natural rubber trading markets and how this is leading buyers and sellers to re-engineer their commercial strategies and invest in procurement, marketing and risk management capabilities, which, in turn, will allow them to optimize manufacturing or production integrated margins.

The central role played by Asian Commodity Exchanges in facilitating the rubber trade has been investigated in depth to understand the implications of liquidity, volatility and relative pricing dynamics on buyers and sellers’ respective purchases and sales.

As producers struggle with the on-going over-supply situation and end-buyers try to mitigate resilient price volatility, market players will be looking at opportunities to protect their margins through enhanced trading and risk management techniques. This report highlights strategic initiatives around portfolio structuring, hedging and operating capabilities that can deliver incremental earnings from active participation in the rubber trading market.


Rubber plays a central role in the global economy, with major applications in the automotive, manufacturing, consumer goods and medical industries. Global rubber demand grew at c.5% per annum between 2009 and 2013 to reach 26.7 Mt, outpacing global GDP growth which averaged c.1.9% per annum during the same period.

Natural Rubber has witnessed significant price volatility over the past 5 years, averaging at c.35% on an annual basis with prices ranging from lows close to $1,000 in H2 2008 and highs close to $6,500 in H1 2011. This degree of price fluctuation is reflective of the difficulties in achieving a stable market balance over the past decade, primarily due to the significant time lag between periods of new planting and yielding of rubber trees, which typically occur in different market demand environments.

Following a largely balanced market between 2004 and 2008, natural rubber witnessed a tight market up to 2011, and has since been oversupplied. Prices consequently dropped sharply, approaching a five year low in 2014, down by c.30% YTD in July 2014.

This market situation has created unparalleled pressure on sellers to protect thin margins, whilst forcing buyers to actively anticipate potentially adverse price movements due to on-going market volatility. Within this context, we have investigated the strategies for buyers and sellers to manage procurement and marketing activities to protect earnings and integrated margins.

Key Findings

Buyers and sellers need to structure their portfolios to achieve optimal risk-adjusted returns. This includes managing security of supply through long-term contracts, participating in the price discovery process through a mix of spot and term contracts, and managing price risk through rolling exchange term contracts for hedging. Decisions related to structuring supply or sales contracts such as price indexation, volumetric options, delivery and other terms will have a substantial impact on the overall cost-efficiency of procurement or revenues from marketing. We highlighted the main strategic areas for buyers and producers to enhance margins from rubber trading:

  • Shifting participation from one exchange to another to balance exposure to pricing volatility and contract liquidity

  • Balancing portfolio spot & term mix to align portfolio flexibility to rubber production or end-products manufacturing cycles

  • Structuring contract terms with volumetric and pricing options to optimize integrated margins and planning

  • Developing hedging strategies to minimize basis risks and secure stability of integrated margins

  • Implementing an operating model, processes and systems which ensure cost-efficiency in the end-to-end trade cycle


Buyers and sellers have a significant opportunity to enhance their commercial strategies for procurement or marketing by actively managing their portfolio to benefit from price dynamics across the main exchanges. However, not all exchange contracts are equivalent. Material changes in liquidity represented by churn rate and open interest will impact volatility. This should prompt buyers and sellers to carefully consider which exchanges they should trade or rely on for price indexation and hedging. Further on, contractual optionalities can be structured to match production uncertainty or manufacturing output variability which will ensure supply security and limit exposure to take-or-pay penalties or reliance on the spot market.

Overall, an enhanced commercial strategy to natural rubber procurement or marketing can deliver gross margin uplift of c.7-12%, providing an important source of incremental value generation. Such an optimal commercial strategy will rely on a trading-centric operating model, backed by front-to-back office processes that ensure cost-effective management of the end-to-end trading cycle.