Rubber Price And Other Commodities Prices Economics Essay

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Raw commodity sector dominates in the economies of many developing countries in terms of production, employment and export earnings. In the last decade of 20th century, an important feature of this commodity sector in the global economy was very low and declining real prices for most raw commodities in the international market, resulting in a significant reduction in revenues from commodity exports in many producing countries. Nowadays, those countries' ability to mobilize due to international trade resources, which are required to implement investment needed for sustainable development, can be undermined by such course of events, as well as in the result of the establishment of tariff and nontariff barriers, including raising tariffs, which restrict the access of developing countries to export markets.

Further in this paper, we aim to cover the importance of natural rubber prices change, which is now seen as a multifunctional economic phenomenon and one of the leading market categories. Changes in rubber prices frequently entail serious social, economic and political consequences. Therefore, it is important to fulfill in-depth analysis of patterns and trends of these changes and provide the society with comprehensive and objective information about raw commodities prices and their influence on other commodities' prices interest.

According to the results of the last year, the cost of natural rubber rose by 65%, and for the last 2 years the price of rubber raw materials nearly tripled having beaten the world record of 1952, when its price grew because of the Korean War (Burger & Smit, 1997).

Futures contracts for rubber supply usually rise in price along with the increase of oil prices, as its substitute, synthetic rubber, is made from oil-products. The cost of oil has updated a record level at $141.71 per barrel; over the past year its price more than doubled. In addition, price increase was affected by adverse weather conditions for rubber trees in China (2008), which led to a significant reduction in production. Suppliers in Thailand, world's leading rubber exporter, increased prices to foreign buyers due to the low production volume (Cheng 2010; 'Recent Trends in Export Restrictions on Raw Materials' 2010).

Natural rubber prices dynamics 2000-2010 ($ per kg) (Cheng 2010)

Unfavorable price dynamics in the market provokes companies dealing with rubber to increase price for their products or accept the fall in profits. Rubber price rising will primarily lead to increased costs of automakers and tire manufacturers, which will then be included into the costs of transporting other goods (Bukenya & Walter 2005).

For example, manufacturers of automobile tires with worldwide reputation, including Continental, Michelin, Goodyear and Bridgestone, has already raised prices for their products by 5-15% since the beginning of the year, while others have already announced the imminent increase. For example, Continental and Goodyear have already provided statements for the penultimate quarter, according to which the company incurred a loss, despite the prices being remained at a maximum level over the last two years (Ciccantell & Smith 2009).

According to the latest forecasts of JD Power consulting company, sales of passenger cars may rise by 10.5% this year alone. And the Italian tire maker Pirelli claims that the demand for trucks tires has increased by almost 50% in the Chinese market (Viswanathan, 2008). Jom Jacob, an economist from the Association of Natural Rubber Producing Countries (ANRPC), predicts that the rubber situation will worsen.

It is clear that the steadily appreciating raw materials are now being considered by investors around the world as a financial asset like oil futures (Ciccantell & Smith 2009). And in the ensuing game on rubber and cotton price hike, like in the case of oil or gold, speculators are whipped up by the weakening of dollar: all these goods are traditionally sold on the market for the American currency; if it falls down, they automatically rise in price.

Different price dynamics of separate commodity groups can be explained in the following way. As a result of the brevity of the production process, for raw materials and semi-products the slightest change in demand immediately affects the price. Firms engaged in manufacturing equipment (production period of which is rather significant), as a rule, have an order portfolio, some stocks of raw materials, therefore in case of conjuncture worsening these firms are able to maintain prices at a high level, and it lasts quite a while before prices start to fall (Cheng 2010).

Products' target purpose also affects the amplitude of price fluctuations. Since raw materials (in our case, rubber) have a broader range of consumers than any equipment, in the fields of raw materials complex the increase in production during recovery of the conjuncture is more rapid than the increase in prices for equipment.

Another important price determinant is the degree of market monopolization. The higher the degree of market monopolization is, the higher prices are and the lower their vibrations are. Confirmation to this can be a comparison of world price movements for rubber and aluminum. Natural rubber market is not monopolized; moreover, it is an exchange commodity facing competition from synthetic rubber. Therefore, the rubber price is exposed to the most powerful and frequent fluctuations (Burger & Smit 1997).

On a whole, trade in raw commodities (including rubber) makes about 25% of world commodity circulation; that is why this sector is of such importance for the world economy and long-term trends and short-term fluctuations in commodity prices. The situation in the markets is extremely important for the economies of developed countries that form the demand for commodities. Any changes in raw commodity prices affect the production cycle in these countries, reflecting in other sectors of the economy and ultimately affecting the growth of consumer prices (Zant 1997). It should also be noted that while the short-term ups and downs in world commodity markets occur regularly, price shocks for many raw commodities generally last a long time.

At the same time, a significant portion of international trade agreements (typically, in order to stabilize prices and improve the income of producers, such instruments of market regulation as buffer stocks or export quotas are used) failed in 1980-90-ies, because the cost of their maintenance had become unacceptable. Only the International Natural Rubber Agreement continues functioning, although its usefulness is increasingly questioned by the countries-producers of rubber (Gilbert 1996).

Thus, the used stabilization programs are the most effective with short-term price shocks, however for long-term declines (rises) it is necessary to develop a policy that would allow countries to adapt to a new level of income and consumption (Cashin 2000).

It is important to overcome the existing distortions in international trade. In particular, the achievement of this goal requires a substantial and gradual reduction of support and protectionism in agriculture (covering the actual production, market access and export subsidies), as well as in industry and other sectors in order to help the more efficient producers, especially in developing countries, to avoid large losses (Lowenhaupt, 2003). Thus, agriculture, industry and other sectors have a scope for initiatives to liberalize trade and implement policies directed on building the production with a more thorough consideration of needs of environment and development.