economic analysis explaining price fluctuations of Rubber in Singapore/ Malaysia between 2013 and 2018

economic analysis explaining price fluctuations of Rubber in Singapore/ Malaysia between 2013 and 2018

Malaysia is the world-leading exporter and producer of natural rubber. The country also has the largest consumption of the natural rubber.  The prices of natural rubber have been fluctuating widely between 2013 and 2018.  The paper attempts to explain the prices fluctuations; this can be attributed to various variables such as demand and supply, inflation rates, currency exchange rates and crude oil price. The demand has an effect of increasing or decreasing the price; excess demand leads to an increase in price while a shortage of demand leads to a decrease in demand. A rise in production leads to a decrease in price. Increase in inflation rate leads to an increase in price. Exchange rates can either increase or decrease price. Crude oil price affects the production of synthetic rubber.

Changes in demand and Supply

The demand for rubber both domestically and internationally affects the price of natural rubber. Generally, the increase in demand leads to an increase in price and decrease in demand leads to a decrease in price (Hirschey, n.p). The local manufactures demand rubber for their production processes leading to the increase in price. Also, an increase in international demand leads to an increase in the prices for rubber. Contrary, a decrease in global and local demand will lead to a decrease in prices for natural rubber.

As demand increases from DD to D1D1, the prices increase from P1 to P2, while a decrease in demand from DD to D2D2, the price declines from P1 to P3.

The supply for natural rubber will also have an effect of affecting the prices for rubber. Generally, an increase in supply leads to a decrease in prices and a decrease in supply leads to an increase in prices (Hirschey, n.p). The rubber is grown in plantation and small scale farmers. If the plantations decrease, their supply will lead to an increase in the prices of rubber and vice versa.

As supply increases from SS to SISI the price decreases from P1 to P3, while the decrease in supply from SS to S2S2 causes increase of price from P1 to P2.

Inflation Rates

Inflation occurs where there is a persistent increase in prices of the commodities (Humphrey, n.p). Between the period, the inflation rate has been rising and falling. An increase in inflation has an effect of increasing the prices of natural, while a decrease in inflation rate has an impact on decreasing the costs. Inflation is caused by macroeconomic factors the control of the firm. As illustrated below, Malaysia has experienced changing inflations rates which directly impact on the prices of rubber.

From the diagram, Malaysia had varying inflation rates over the period under consideration, with the highest inflation rate in 2017 of 3.87% and lowest inflation of 0.88% in 2018.

Currency Exchange Rate

Exchange rate volatility influences the price of natural rubber. The exchange rate varies according to the demand of the domestic market concerning the foreign market (Choi, p.67).  If the currency exchange rates appreciate will lead to increase in demand for rubber resulting to an increase with a decrease in rubber price, whereas if the currency exchange depreciates, will lead to a decline in demand resulting to a rise in rubber prices.

Crude Oil Price

Crude oil prices are determined usually set by international bodies such as Oil Producing Exporting Countries (OPEC). The oil prices have a direct effect on the price of rubber (Hamilton,n.p). The crude oil is used to manufacture the synthetic rubber, which is an alternative to natural rubber.  If the prices of crude oil have increased have the effect of reducing the demand for rubber; hence, less synthetic rubber will be produced resulting to an increase in demand for natural rubber, which will be sold at higher prices. On the other hand, a decrease crude oil price will lead to increased demand for oil and manufacture of synthetic rubber which result to a decline in demand for natural rubber and it will be sold at a lower price.

Agricultural Activities

The agricultural activities can be affected by various factors such as climate, pest and diseases and technology used for production. The favourable climate will lead to an increase in the production of rubber, while the adverse climate will lead to lower production. Pest and diseases have an effect of lowering the production of rubber. Inappropriate technology will lead to a decline in the production of rubber, while relevant technology will lead to an increase in the production of natural rubber. The decline in rubber production will create a shortage in supply attracting high prices for rubber, in case of excess supply for rubber, competitors will be willing to dispose of their rubber at lower prices.

Government Policies

Government policies have the impact of increasing or decreasing the prices of natural rubber.  The government may adopt measures such as changing taxation policies and subsidies (Stadelmann, n.p). The government can increase the tax rates that will have the effect of increasing the price of rubbers; the cost of production increases and producers passes the additional cost to consumers by increasing the prices of rubber. The government can also offer subsidies. Subsidies have an effect of reducing the costs of production. The producers will pass the benefits to consumers by selling at lower prices. The government may pass legislation of increasing or decreasing interest rates. Increase in interest rates will have an impact of increasing the price of rubber, while a decrease in interest rates will have an effect of reducing the rubber prices.

Rubber Stock

The available rubber stock will have an impact on rubber price. If the current level of rubber inventory is high; the producers will be willing to dispose their i at lower prices, whereas if the level of inventory is low, the producers will sell their rubber at high prices.  The level of inventory will be affected by the demand and supply of rubber (Huang and Miao, n.p).

Future Market Interventions

The producers do usually make demand forecasts for rubber. Producers have to make demand projections to meet both domestic and international demand. If the actual demand exceeds the predicted demand, it has the effect of increasing the price of rubber, while if the demand forecasts exceed the actual demand; there will be excess stock have the impact of reducing the rubber price. The producers should accurately predict the demand to minimise the effects of rubber prices resulting from forecasting errors.

Conclusions

The price of rubber is influenced by several factors including demand and supply, inflation rate, currency exchange rates, inflation rates, crude oil prices, agricultural activities, government policies, rubber stock and future market intervention.  Increase and decrease in demand results to price increase and price decrease, respectively. Increase in inflation leads to a rise in rubber prices. Increase in exchange rate leads to a rise in the price of rubber. Crude oil prices affect the demand of synthetic rubber; reduction in oil prices lead to high demand crude oil and reduction of natural rubber price.  A decline in agricultural activities leads to lower production of rubber, attracting high price for rubber. Government increase in tax rates leads to high rubber price, while subsidies lower the price. Availability of rubber stock leads to low rubber price. If the actual demands exceed the projected demand will lead to high rubber price.