The “Lehman Brothers” Moment of Rubber Industry, Rise and Fall of Chongqing General

On 27th of Sept, a short announcement made by Chongqing General, China’s top rubber trading company, shocked the world’s rubber industry.

On 27th of Sept, a quiet Friday ahead of China’s long national holiday, a short announcement made by Chongqing General’s trading unit shocked the world’s rubber industry.

“ From today onward, Chongqing General (CQ) will halt all (Rubber) business.” It said in the announcement without any detailed explanations, but suggested their business counterparties to either cancel their existing contract (if not yet exercised), or claim back documents from banks if already passed.

CQ General is believed to be the largest commodity trading company in western China. It is part of the state owned giant ‘Chongqing General Trading Group’.

Their main business varies from natural rubber, synthetic rubber, to other petro related chemicals.

CQ was especially big in the natural rubber trading business, it is believed they have imported over 1 million metric tons natural rubber continuously for the past few years.

Just beginning of this year, CQ announced it has signed contract with one major Thai producer(SLR) to import natural rubber with a total value at 500 Million USD in 2019.

An active trading company like CQ General with such a huge volume to ‘default’ its contracts has never been heard in the industry before.

After the announcement, market reacted with panic and confusion.

Sicom TSR dipped by almost 4% to one year low (from 132 to 127) , Tocom RSS dropped over 5% from 165.3 to 156.7 Yen/kg.

SHFE Jan contract dropped by 2% from 11600 to 11360.

CQ runs a unique business model with its partners.

In Thailand, a tolling concept was introduced, where CQ literally ‘rent’ factories from a few selected rubber producers, while being fully responsible of buying raw material and selling finished products.

Such model is enjoyed by both side, producer can receive a stable rental income while CQ gets rubber in huge volume.

But many others find it difficult to cooperate with.

‘It was very hard for us to operate when CQ push the raw material price to unreasonable level’ manager from one rubber producer mentioned.

‘We can never compete with someone who is willing to buy high and sell low.’ Manager from another producer said.

As a result, some of Thailand’s oldest rubber processor were forced out of business, and many were suffering big loss.

CQ and its partners were also the sole taker of SICOM / TOCOM delivery for the past few month, absorbing over 10,000 MT to 20,000 MT of delivered rubber.

Such situation of “one buyer vs multiple seller” was never seen in the industry before.

Nevertheless, CQ’s operation has not been very smooth.

With a bearish macro environment where demand continue to shrink, it was difficult for them to push and maintain rubber price at high level.

Many started to question CQ’s real purpose, wondering how they make money and if such business model is sustainable.

As Rubber price continue to drop on gloomy economy outlook, ‘骑虎难下’ A Chinese proverb, describing one is riding a tiger and forced to move on, may best describe CQ’s latest situation.

Last Friday, CQ, per many people’s expectation, finally get a taste of its own medicine.

No one knows what will happen next.

What would happen to CQ’s rubber division? What would happen to its Thai partners? What would happen to their customers? What about banks, warehouses, shipping lines, logistic companies and many other stake holders?

But one thing we all know, 27th Sept is a crucial day, the “Lehman Brothers” moment for rubber industry.