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Commodities

Commodities slide hits Southeast Asia

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A worker collects oil palm fruit inside a palm oil factory in Sepang, outside Kuala Lumpur.   © Reuters

TOKYO -- Crude oil's dramatic tumble is weighing down international prices of commodities, especially those produced in Southeast Asia, such as natural rubber and palm oil. Further taking a toll on such products is a flight of investor cash from the commodities market as the dollar strengthens against the yen and other Asian currencies.

     For the Southeast Asian economies that rely heavily on exports of those materials, the oil slump is having an indirect but painful impact.

     Natural rubber, the main ingredient in tires, is trading at low levels amid slackening demand from China, the world's biggest rubber consumer, and an expanding supply as plantations increase their acreage.

     In autumn last year, Thailand -- the world's largest producer of the material -- and other natural-rubber exporters decided to adjust their supply to shore up prices, but low oil prices are foiling that effort. That is because of the competitive relationship between rubber and oil.

     "When oil prices go down, prices for natural rubber tend to fall as well," said Shinichi Kato, president of Japanese rubber trader Shinichi Kato Office. Tires are made from a mixture of natural and synthetic rubber, which is made from petroleum. When oil prices drop, the ratio of the synthetic variety increases, while natural rubber loses appeal.

     The Malay Peninsula is home to a large number of rubber plantations, big and small. Production there took a hit after record rains triggered flooding in late 2014.

     In early January, the price for RSS3 sheet rubber on the Tokyo Commodity Exchange rose to a six-month high of 214 yen ($1.81) per kilogram. But by mid-January, the uptrend had lost steam, with the price sliding back to about 195 yen, roughly the pre-flood level.

     "When the prices of most international commodities are falling, it's hard for rubber prices to rise on their own," said Masayo Kondo, president of Commodity Intelligence, a Japanese commodities market research company.

Palm oil takes a hit

Crude's decline is also impacting prices of palm oil, a major Southeast Asian export and a vital ingredient in cooking oil and soap. Although prices of the material are trending slightly higher at the moment, "low oil prices are limiting the growth margin for palm-oil prices," said a source at a trading house. In Indonesia and other producers, biodiesel made from palm oil has become a viable alternative to regular diesel as a vehicle fuel. But as oil prices fall, demand is shifting from palm-based biodiesel to regular diesel.

     Demand for palm oil has received a short-term boost from population and economic growth in Asia, but prices have been softening over the longer term. In Malaysia, for example, the commodity is trading at around 2,350 ringgit ($660) per ton, down 8% year on year and more than 30% below the recent high logged in April 2012.

     Palm-oil prices are also influenced by the weather in producing nations and prices for U.S.-produced soybeans, which are used to make edible oil. In March 2014, palm oil soared to 2,850 ringgit per ton on concerns about a drought in Asia. But in August 2014, a U.S. bumper crop pushed down soybean prices, raising the prospect of a cooking-oil glut, which in turn sent palm-oil prices plummeting.

     Also working against commodities in general is the dollar's recent rapid rise against the yen and other Asian currencies, which is making investors more risk-averse. "Investor money is draining out of the commodities market," said Makiko Tsugata, an analyst at Market Risk Advisory, a Japanese investment advisory company.

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