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SGX calls attention to rubber derivatives amid supply shortage

Jovi Ho
Jovi Ho • 7 min read
SGX calls attention to rubber derivatives amid supply shortage
Tan: For industry participants and investors, when they choose to express a view in the industry, what we offer here is not just a derivatives market but also the equities market. Photo: Albert Chua/The Edge Singapore
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The Singapore Exchange S68 -

(SGX) Group, itself listed on the bourse, has reported revenue across four segments since the release of its results for 1HFY2024 ended Dec 31, 2023. They are fixed income, currencies and commodities (FICC); cash equities; equity derivatives; and platform and others.

Up until its previous set of results for FY2023, SGX had classified revenue under three segments: FICC; equities; and data, connectivity and indices.

With the change, revenue contributions across the four segments are more evenly distributed in 1HFY2024 at 25.6% for FICC, 26.9% for cash equities, 27.1% for equity derivatives and 20.3% for platform and others.

Market conditions may not have been conducive for new equity listings over the past two years, but the group enjoyed a boost in over-the-counter foreign exchange (OTC FX) trading and iron ore derivatives in 1HFY2024.

Commodity derivatives volumes increased 48.3% y-o-y to 28.7 million contracts during 1HFY2024. This was primarily due to higher volumes in iron ore derivatives, which rose 48.7% y-o-y to some 25.4 million contracts.

Two other sub-segments also posted similar increases during the period; freight and rubber derivatives volumes rose 46.4% and 45.2% y-o-y to some 1.3 million and 1.5 million contracts, respectively.

See also: SGX enjoys FX, iron ore derivatives boost in 1HFY2024; insists spac rules 'work'

Commodities trading has gone through SGX for over a decade; SGX brought the Singapore Commodity Exchange (Sicom) into its fold in June 2008 following a reported $7.5 million acquisition.

SGX believes there is a story in rubber, which is produced and traded in two main forms: ribbed smoked sheets (RSS) and technically specified rubber (TSR). RSS refers to liquid latex rolled into sheets and put through a smoking process. TSR refers to liquid latex allowed to congeal naturally, and reformed into blocks used in tyre manufacturing.

According to SGX, some 80% of natural rubber is processed into TSR, also known as “standard rubber”.

See also: From 2021: Reinventing the rubber trade: Can Singapore keep up?

An accompanying number indicates the quality, such as TSR10, TSR20, RSS1 and RSS3; a smaller number indicates higher quality. Two mainstream grades of rubber are traded on the SGX: RSS3 and TSR20.

The volume of rubber futures traded on the exchange grew 40% y-o-y in 2023. The traded volume of TSR20 rubber futures reached a record high of 381,389 contracts in May, up 86% y-o-y. Rubber derivatives clearing volume reached a record of 1.9 million metric tonnes in May, joining records notched by dairy and petrochemicals derivatives.

“Strong market participation has seen record volumes and open interests across multiple commodity derivatives suites in May,” says Tan Tee Yong, head of commodity derivatives at SGX.

The volume of TSR20 rubber options traded, meanwhile, fell 80% y-o-y to just 40 contracts that month, down from 340 and 400 contracts in March and April.

One month shy of the financial year-end, SGX has logged 4,370 TSR20 rubber options contracts since July 2023, up from 1,580 last year. These contracts were an industry-first when launched by SGX in May 2019.

The exchange had “high expectations” for the market adoption of TSR20 rubber options, says Tan to The Edge Singapore. “But maybe because it is quite an old industry, it has seen quite a slow take-up in terms of trading in options. That said, our [rubber] futures volume has seen a steep jump, achieving some daily records in the past six months.”

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For 1Q2024, the daily average volume for rubber derivatives rose 71% y-o-y to 14,000 lots. SGX logged a record single-day volume of 44,000 lots during the quarter on March 18.

Oversupply to supply shortage

SGX says Thailand, Indonesia and Malaysia account for 57% of global rubber production. Meanwhile, China (40%) and the rest of Asia (30%) are the biggest consumers of rubber.

With rising prices for rubber, however, Southeast Asian nations like Vietnam, Myanmar and Cambodia are also increasing production. These “non-traditional rubber producers” are also sprouting out of Africa, in Ivory Coast and Gabon.

They are responding to a shift in the rubber industry, from an oversupply to a supply shortage. Due to lower planting and replanting rates since 2017, yields from major producing countries like Indonesia have fallen, as ageing rubber trees produce lower yields.

The oversupply, too, was a response to unprecedented peaks in natural rubber prices in 2011, which prompted a “planting boom” that continued through 2016, says Jom Jacob, chief analyst and co-founder of WhatNext Rubber Media International.

“For example, Thailand planted rubber at the average rate of 185,000 hectares per annum from 2011 to 2016 due to farmers’ positive response to favourable prices,” adds Jacob.

Rubber trees have a gestation period of around seven years. The planting boom from 2011 to 2016 translated into a major increase in supply from 2018 onwards, says Jacob. “The oversupply remained a critical factor [in] keeping the prices down until 2023.”

However, he adds that farmers lost their enthusiasm for planting in 2017 as prices sharply spiralled downward. The average rate of new-planting in Thailand came down to 31,000 hectares per annum from 2017 to 2023.

Jacobs also notes a “substantial fall” in latex yield from the trees. “As a result, many farmers felt rubber cultivation economically unviable. Adding to their hardships, rubber trees in an estimated 400,000 hectares in Indonesia and 150,000 hectares in Thailand were infected by a fungal leaf spot disease from 2018 to 2023. The disease can potentially reduce the yield up to 30% for the succeeding two years.”

Adding to farmers’ concerns were unusually hot weather and excessive rainfall due to climate change and a shortage of skilled workers in Thailand and Malaysia following the outbreak of Covid-19. “All these factors contributed to largescale shifts from rubber to other crops, particularly in Thailand, Indonesia and Malaysia,” says Jacobs. “Thailand’s government encouraged [a] crop-shift from rubber by offering an attractive financial incentive of around US$3,500 ($4,732) per hectare to address the excess supply in the market.”

With the seven years it will take rubber trees to mature, Jacobs sees the shortage lasting till 2031. However, if prices rebound in 2024, he believes farmers would increase their output by adopting “intensive harvesting and other shortterm measures”.

While Jacobs believes this may keep supply up in 2024 and 2025, the current price of rubber stands at a third of the 2011 peak; farmers may not be sufficiently incentivised to return to the crop.

Given the oversupply in recent years, Tan has seen rubber stockpiles building up. Although some stocks were depleted last year, some remaining stockpiles still need to be digested, he adds. “Because of the low prices that we’ve seen over the past few years, what has happened is [that] quite a substantial acreage of rubber plantation is untapped, so farmers choose not to tap them. But of course, they will get activated when prices reach the levels that they think is reasonable.”

‘Nerve centre’ for rubber

Sicom commemorates its 30th anniversary this year. Tan says it remains the “nerve centre” for the global rubber industry. “Our neutrality will continue to underpin the trust that the industry has placed on us in providing the global benchmark and global reference.”

But SGX is not the only exchange eyeing a piece of this pie. How do they distinguish themselves from the Shanghai Futures Exchange (SHFE), Shanghai International Energy Exchange (INE), Osaka Exchange (OSE) and Thailand Futures Exchange (TFEX), to name a few?

From Southeast Asia, rubber contracts traded through SGX typically pertain to rubber export prices, while the Chinese exchanges are more involved with the landed price or import price. “So, in some sense, we are sort of competitors, but we also exist in a very symbiotic way,” says Tan. “So, physical market participants can use us to manage their supply chain risks more comprehensively from export to import.”

Today, SGX’s rubber derivatives market participants are mainly based in Singapore, Europe, the US and China. “Moving ahead, we will focus on growing outside of Asia,” says Tan.

Europe and the US are “high-growth markets”, he adds. “In 2023, this segment registered the highest jump in contribution share for our rubber derivatives volume.”

SGX’s multi-asset strategy means that the “waterfront for rubber” is not limited only to the derivatives business, says Tan. “We also have several listcos involved in the rubber-related business, spanning rubber products, rubber chemicals, the distribution [and] manufacturing of gloves, and also sales and distribution of tyres and automobiles.”

The 13 listed companies include glove manufacturers Top Glove, UG Healthcare, Sri Trang Gloves STG -

and Riverstone Holdings AP4 - . Other names include Sri Trang Agro-Industry, Halcyon Agri and China Sunsine Chemical Holdings QES - .

“For industry participants and investors, when they choose to express a view in the industry, what we offer here is not just a derivatives market but also the equities market,” adds Tan.

Photos: Albert Chua/The Edge Singapore

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