Kotak Commodity Services Ltd

*China’s largest state-owned trader CGTC has ceased all physical trading of the commodity

*The slump especially with futures trading below physicals price

China’s largest state-owned trader of rubber Chongqing General Trading Chemical (CGTC) had paid a price for making excessive speculative trades. The CGTC which accounts for almost a third of China’s rubber supply, followed misjudged bets on rubber prices, said an Indian rubber importer familiar with the matter. Rubber prices spiraled lower across Asia last week on news that CGTC has ceased all physical trading of the commodity. This will likely further delay the revival of rubber prices. The industry has been buffeted by a series of headwinds, from oversupply that pushed producers to limit exports in an effort to prop up prices, to drought, flood and disease that has hurt the trees needed to produce latex.

Futures in Tokyo, Singapore, India and Shanghai are more than 60% off their peak 8 years ago. A spokeswoman of CGTC in the western Chinese city of Chongqing said the company was closely studying the situation, without giving further details. The company importing 1.6 million tons a year, imported too much rubber and faced liquidity issues, China bought 2.6 million tons of rubber last year. The impact on shipments is likely to last until the end of the year, and market participants are waiting to see how the move will affect producer countries. The slump could stoke buying interest from dealers and tire makers, especially with futures trading below physicals price.

Tokyo Commodity Exchange after snapping a seven-session losing streak March delivery finished 1.5 yen higher at 157.1 yen ($1.47) per kg, after recovering from an earlier decline. For the week, it lost 2.7% and booked a third weekly loss. The Shanghai Futures Exchange is closed between Oct. 1 and Oct. 7 for the National Day holiday and will reopen on Oct. 8. The closing price of the most active rubber contract on the Shanghai futures exchange was Rmb11,470 ($1,600) per tonne at the end of last month, little changed on Rmb11,450 at the beginning of this year.

The front-month rubber contract on Singapore's SICOM exchange for November delivery last traded at 124.9 US cents per kg, up 0.2%. India's natural rubber imports in August were at 57,821 ton, up 13.5% on month, Directorate General of Commercial Intelligence and Statistics data showed. The India imported 275,127 ton rubber in Jan-Aug. October futures contract on the Indian Commodity Exchange hit an 11-month low of Rs.11,990 per 100 kg. Prices of the RSS-3 variety fell by $1.23 to $141.40 per 100 kg in Thailand.

Traders who work with the CGTS company said it had failed to pay for at least 100,000 ton of rubber it bought on credit. The company was also unable to fulfill contracts with its domestic clients, including tyremakers and trading companies. This is having a huge impact on the market given CGTC’s reputation as a large and reliable player,” said a trader. CGTC ran into a liquidity crisis after making duff bets on rubber, which has traded sideways despite a slowing global economy, according to traders.

(Disclaimer: This analysis is only for educational purpose and is not and must not be construed as investment advice. It is analysis based purely on economic theory and empirical evidence. Readers are requested to kindly consider their own view first, before taking any position.) Date: 7-10-2019

Riddhi Siddhi Bullions Ltd

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