Market and product

Rubber shortages are about to turninto a flood as China, the biggest consumer, grows at theslowest pace in three years, driving prices paid by Bridgestone Corp. and other tiremakers to the lowest since 2009.

The surplus will reach 402,000 metric tons in the secondhalf, from a 134,000-ton deficit in the first six months, saidChris Pardey, a former commodities trader at Cargill Inc. andNoble Group Ltd. Futures, which entered a bear market lastmonth, will drop a further 20 percent to 200 yen a kilogram($2,534 a metric ton) in Tokyo by the end of the year, thelowest since October 2009, according to the median of 15 analystand trader estimates compiled by Bloomberg.

This quarter’s 23 percent decline is the worst since theglobal financial crisis in 2008 and exceeds a 16 percent retreatin commodities. The slump is reducing income for growers from Thailand to Ivory Coast to Indonesia and costs for Bridgestone,the world’s largest tiremaker. Shares of the Tokyo-based companywill advance 33 percent in the next 12 months, the average of 11analyst estimates compiled by Bloomberg shows.

“We do remain bearish,” said Singapore-based Pardey, whois now the chief executive officer of RCMA Commodities AsiaGroup and predicted in January that prices would decline becauseof a weakening global economy. “There is potential for asignificant increase in stockpiles in the second half asproduction picks up quickly and demand slows down.”

Raw Materials

Rubber fell 5.1 percent to 250 yen a kilogram on the TokyoCommodity Exchange this year, 53 percent below the record 535.7yen reached in February 2011. The Standard & Poor’s GSCI Index (MXWD)of 24 raw materials lost 9.1 percent this year, and the MSCIAll-Country World Index of equities gained 3.7 percent.Treasuries returned 2 percent, a Bank of America Corp. indexshows.

Traders are increasingly bearish as production expands evenas prices slump. The median of 14 estimates compiled byBloomberg in January was for futures to drop as low as 240 yenthis year, a level reached June 4.

Farmers may extract a record 11.4 million tons this year,exceeding demand of 11.1 million tons, according to Pardey. Thesurplus will reach 320,000 tons, according to Prachaya Jumpasut,the managing director of The Rubber Economist, a London-basedadviser to the industry.

Commercial Vehicles

Sales of trucks in China fell 6.1 percent in the first fivemonths as passenger vehicles grew 5.5 percent, China Associationof Automobile Manufacturers data show. A tire for a medium toheavy commercial vehicle uses as much as 18 kilograms (40pounds) of natural rubber on average, compared with less than 1kilogram for a passenger car, according to Jeremie Capron, ananalyst at CLSA Asia-Pacific Markets in Singapore.

China accounts for 33 percent of global demand and tiresrepresent 70 percent of natural rubber consumption in thecountry, according to Sri Trang (Shanghai) Ltd., a unit ofThailand’s biggest publicly listed producer. China's economywill grow 7.9 percent in the three months to June, slowing for asixth consecutive quarter, the median of 27 economist estimatescompiled by Bloomberg show.

Policy makers are seeking to halt the deceleration. Chinesebanks made record loans in May after the government cut theamount of cash they must set aside as reserves for a third timein six months. The central bank cut interest rates this monthfor the first time since 2008. The U.S. Federal Reserve’s OpenMarket Committee, which sets the course of policy, begins a two-day meeting today.

Shanghai Exchange

The world’s largest emerging-market nations formalizedfunding pledges to the International Monetary Fund at a meetingin Mexico this week, boosting its lending power to protect theworld economy from Europe’s debt turmoil. With the addition ofnew pledges, the Washington-based lender said it now hasreceived funding commitments of $456 billion, up from theroughly $430 billion it said it had secured in April.

The government of Thailand, representing 31 percent ofglobal supply, is purchasing rubber domestically at above-marketrates to help farmers and said last month it will also buy morethan 10,000 tons from Tokyo and Shanghai bourses. Thailand andIndonesia, the second-largest grower, are considering measuresincluding export delays and more purchases and are seekingcooperation from Malaysia, the third-biggest shipper, DeputyFarm Minister Nattawut Saikuar said June 1.

Study Group

While global truck sales will probably drop 2.6 percentthis year, purchases of light vehicles should rise 5.8 percent,said May Arthapan, a Bangkok-based director at LMC AutomotiveThailand, part of Oxford, England-based research company LMCAutomotive Ltd. The Singapore-based International Rubber Study Group. whose membership includes 36 countries, predicts natural-rubber demand rising 3.4 percent this year as supply gains 3.2percent. It is scheduled to release new forecasts this month.

While commodity analysts are getting more bearish, thosefollowing tiremakers are increasingly bullish, with 71 percentcovering Bridgestone recommending investors buy the shares. Theproportion was 21 percent in January 2011, a month before rubberreached a record, data compiled by Bloomberg show.

The company will report a 69 percent increase in net incometo 174.5 billion yen this year, the mean of 13 analyst estimatesshows, as production recovers from the earthquake and tsunamithat battered Japan’s industry in March 2011. The precedingmonth, analysts were predicting profit of as little as 124.1billion yen for 2012, data compiled by Bloomberg show. Shares ofBridgestone dropped 0.9 percent this year and will reach 2,308yen in 12 months, according to the estimates.

Bonded Warehouses

Shares of Michelin & Cie., the second-biggest tiremaker,will rise 32 percent to 65.23 euros in the next 12 months,extending this year’s 8.1 percent advance, the average of 13analyst estimates shows. Of the 22 analysts covering theClermont-Ferrand, France-based company and tracked by Bloomberg,77 percent recommend buying the stock.

Tiremakers will have ample supply, with stockpiles held bytraders and in bonded warehouses at Qingdao, the main hub forChinese imports, rising 20 percent to a three-year high of332,600 tons by December, according to the Association ofNatural Rubber Producing Countries. The Kuala Lumpur-basedgroup’s 11 members represent about 93 percent of production.

Inventories are increasing as Chinese demand drops 2.3percent to 3.69 million tons this year, according to RCMA.European consumption will probably decline 3.7 percent to 1.43million tons as U.S. usage stays little changed at 964,000 tons,the trading group estimates.

“It would be quite impossible for any other country toplug the hole left by a decline in Chinese consumption,” saidLou Zhi, the head of the trading department at Hunter CapitalLtd., a commodity hedge fund based in the northeastern Chinesecity of Dalian. “A structural bear market is in place forindustrial commodities.”