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 Tokyo rubber futures hit skids, pose Shanghai dilemma

Published: 17 Jun 2009 01:16:21 PST

* TOCOM rubber trade dives on falling demand, longer hours

* Shanghai volumes, open interest surge, despite obstacles

* Tokyo still sets physical tone, but for how long?

SINGAPORE/TOKYO, June 17 - The days of preeminence for Tokyo s rubber futures contracts appear increasingly numbered, as dwindling open interest and longer trading hours aid Shanghai s ascent as the main centre for price direction.

While liquidity on both exchanges suffered in the wake of the financial crisis that slashed demand for all raw materials, including rubber, turnover on the Tokyo Commodity Exchange <0#JRU:> has continued to decline this year, falling by half, while Shanghai activity has doubled from a year ago.

Open interest has slumped to its lowest in years as both retail investors and end-users pull out of Japan s domestic commodities markets, while Shanghai trade has soared as speculators banked on China s voracious appetite for rubber.

Japan has been here before.

"There is a risk of the death of a market," said a manager in charge of rubber at a Japanese commodity brokerage, who declined to be named to avoid potential problems with the exchange.

"A shift in Japan s main industry sector in the past resulted in extinction of some listed futures contracts like raw silk, wool yarn and rayon yarn. But I ve never heard of a system change causing a contract to disappear."

As rubber dealers gather at a conference in Vientiane this week to discuss issues ranging from price trends to tyre demand, they will also ponder TOCOM s declining role as a price-setter -- and the obstacles in adopting a China-based benchmark.

For graphics on rubber turnover and open interest, click:

"The role of Japan is not so dominant, even more so in this economic crisis, and people think the fundamentals are better represented in China now," said Djoko Said Damardjati, secretary-general of the ANRPC, whose members account for more than 93 percent of global natural rubber output.

"For the moment, China is taking the lead in buying rubber so interest shifts to the Shanghai rubber markets and this can be seen from how its auto industry is thriving despite the problems everywhere else."


In many respects the shift is natural -- China overtook the United States as the world s biggest importer seven years ago, while demand by automaking giant Japan has stalled as more manufacturers move production overseas.

China now uses 16 percent of the world s natural rubber, while Japan uses about 9 percent.

China s auto sector has also been a bright spot for an otherwise gloomy industry as the economic meltdown forced many to scale back production, cut jobs and close factories. Passenger car sales in May soared 47 percent from a year earlier as stimulus measures lured consumers to showrooms. [ID:nSHA187104]

But TOCOM s woes are in part self-inflicted.

Last month, the 25-year-old exchange undertook a major systems overhaul, including the extension of rubber trading until 1000 GMT, a move that has made many users uneasy, spreading already thin liquidity over a longer timeframe.

Previously the market shut at 0830 GMT, which is 3.30 p.m. in Thailand, source of a third of the world s natural rubber and the main centre for physical trading.

Trading settles at 0630 GMT, and the night session between 0800 GMT and 1000 GMT is registered as part of the following day.

TOCOM has also introduced a circuit breaker system to eliminate the frustration of daily price limits, a long-overdue modernisation for many traders but an unwelcome change for many less sophisticated players who fear they may be exposed to unlimited losses, making them reluctant to trade in large lots.

"Shippers and producers have some doubts over TOCOM s stance, saying that it reflects the needs of fund managers, not their own," said the manager at the Japanese brokerage.

Concerned that its importance as an exchange is diminishing, TOCOM has appealed to overseas financial authorities, including those in Hong Kong and Singapore, to approve new trading rules to allow foreign investors to trade directly on the exchange, instead of placing orders at a member brokerage.

"Trading volume has fallen sharply since the new system was introduced," Kazunari Hayakawa, executive managing officer of Tokyo Commodity Exchange Inc, said at a news conference on Wednesday, attributing the decline to overseas traders who were unaccustomed to the new measures.


Despite the poor reception of new measures, dealers are unlikely to abandon the Tokyo market for now. While major tyre makers such as Bridgestone Corp <5108.T> have traditionally avoided volatility in futures prices on TOCOM, producers and shippers still use the market for hedging and provide liquidity.

And the alternative has problems.

Although China s demand influences physical prices in main producers Thailand, Indonesia and Malaysia, Shanghai rubber futures lack accessibility to foreign participants, said dealers.

"If you have some business in China doing rubber, you may take it as a benchmark. Other than that it s quite difficult. You need to have an account in China," said Avtar Sandu, manager of Asian commodities at Phillip Futures in Singapore.

Currency may also be a turn-off for physical dealers because the Shanghai market is denominated in yuan, which is not fully convertible. TOCOM, on the other hand, is traded in yen.

"I don t think the government is ready to open the Shanghai market to foreign participants," said a dealer in Thailand s southern city of Hat Yai. "But once China opens up its market, it will replace TOCOM." (With reporting by Niluksi Koswanage in KUALA LUMPUR, Alfred Cang in SHANGHAI and Nick Trevethan in SINGAPORE, Editing by Ben Tan and Jonathan Leff)