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Given that rubber is a volatile commodity, the Asian bloc, being the world’s largest rubber supplier is not spared from the travails of high inventories, unpredictable demand, and price swings. But is the region coping, asks Angelica Buan in this report.
Low prices due to glut situation
The world’s rubber consumption of natural rubber reached 11.3 million tonnes in 2013 and the requirement is predicted to rise to 11.8 million tonnes in 2014.
At the onset of the year, rubber prices were projected to hit bedrock amidst the low-production season, thus resulting in low inventories for sale especially in Asian rubber producing countries, according to the International Rubber Consortium (IRCO). A tripartite group comprising Indonesia, Malaysia and Thailand, IRCO accounts for about a third of global output.
A previous strategy IRCO had implemented had seen curbing of exports by 300,000 tonnes. The cartel failed in this strategy, henceforth contributing to a pessimistic precedent to the state of rubber prices this year, which some analysts expect to hover low for some time.
However, stockpiles rose at the end of the first quarter, with supply again outpacing demand. Surplus supplies of rubber have spiked further as demand from natural rubber buyers like the US and China remains languid. The latter, which accounts for almost a third of global rubber demand, is in itself steeped in a high rubber inventory.
The glut, according to New York-headquartered industry information provider Platts has seen a 30% fall in prices of rubber in Asia.
Meanwhile, the low-production season could only provide a sliver of relief to the glut. The UK-headquartered industry analyst The Rubber Economists reports that global stockpiles are rising, with inventories likely to reach 3.79 million tonnes by the end of 2014 and 4.33 million tonnes by 2015.
Planters in Thailand offer price relief suggestions
Affected countries in the region have sought remedies to shore up prices, or to say the least, reverse the effects of declining prices.
The world’s top producer, Thailand, which presently exports 90% of its domestic output, is struggling to cope with declining prices, which have dropped for the third year to 50 baht/kg from 100 baht in 2012. The price slump is set to wipe off 36 billion baht from the local rubber industry this year, according to a rubber researcher.
Thus, the country is revising its long-term and short-term rubber infrastructure to buffer the price declines (as well as address the rubber glut). A budget of 5.9 billion baht has been allocated by the National Council for Peace and Order (NCPO) to implement measures to overhaul the sector, consisting of nine policies and 12 projects over a period of ten years.
The measures involve maintaining a stock to stabilise prices, improving planters’ liquidity, developing the rubber market and conducting R&D on rubber products, said Winthai Suwaree, an NCPO spokesman. For the short term of up to ten years, product prices will be buoyed by increasing market liquidity, adding value and improving quality of products and more lending to rubber operators.
Suwaree said, “In the short term, more markets must be found and products traded at appropriate prices. In the long term, domestic use should be optimised and a balance between demand and supply must be maintained.”
This action comes after representatives of the rubber farmers’ network submitted a letter to Prime Minister Prayuth Chan-ocha to propose measures for their survival. The six-group network suggested two emergency measures, which includes stopping the sale of the 210,000 tonnes of rubber in the government’s stockpile, saying the move would further push down prices.
They also urged all agencies to think of how to process or add value to rubber such as adding latex to asphalt in road construction or building playgrounds or futsal fields. The government should also keep track of the quantity and quality of the rubber in its stock to stabilise prices.
In the medium term, the farmers suggest a restructuring of the Thai rubber market so it can be used as a reference for prices for Asean and the world instead of foreign futures markets. The planters say they should take part in the making of rubber products while the government can help in terms of financing and marketing. They also want the government to approve a revolving fund worth 10 billion baht for stockpiling and 5 billion baht in credit for processing rubber.
In Nakhon Si Thammarat, ten representatives of the farmers’ council of the southern province worst affected by the rubber prices and glut said that about 100,000 families of rubber growers in the province were in deep trouble.
Prateep Kleepkaew, Chairman of the local farmers’ council, said the rubber prices were much lower than production costs leading the families of rubber growers to be short of funds to maintain their livelihoods.
In Trang, the Bank of Agriculture and Agricultural Cooperative (BAAC) is speeding up payments under the farm essentials subsidy programme. BAAC Trang Director Panumas Tunnsu said planters should look for extra incomes and apply the sufficiency economy principle.
Some 58,000 planters registered in the programme, of whom 12,630 were paid by the BAAC. However, most of their documents were either redundant or incomplete, causing payment delays. The earlier Yingluck Shinawatra government approved a subsidy for farm essentials at 2,520 baht/acre. The BAAC has already paid 1.27 billion baht under the programme. Since most rubber planters are small, with an average plantation of 10 acres a household and production of 264 kg/year, they earn more than 100,000 baht/year.
Indonesia aids farmers with credit limits
Following Thailand, in terms of production, Indonesia is against the 10% value-added tax (VAT) to be levied on certain agricultural products, including rubber. The Indonesian Rubber Producers Association (Gapkindo) explains that the tax could burden the sector’s production and exports. Specifically, part of the rubber growers’ working capital will only go towards paying taxes instead of spending on production, says Gapkindo. The association adds that the untimely proposition will further strain farmers’ declining incomes, which are already affected due to falling prices as well as competition from emerging new industry players.
Offering some relief, Indonesia’s state bank PT Bank Mandiri increased the credit limit for the rubber plantation and rubber processing industry to Rp7.3 trillion in the first half of this year, from Rp6.9 trillion in the same period last year.
Commercial and Business Banking Director of the publicly traded bank, Sunarso, said he is optimistic the rubber industry would revive with the improvement of the performance of the automotive industry in the US and Asia. In addition, the implementation of export retail policy by the world’s three largest producers, Thailand, Indonesia and Malaysia, would help sustain the rubber market, Sunarso said.
Credit commitments of Bank Mandiri for the rubber industry reached almost 10% of its total credit commitments of Rp88.6 trillion in the plantation sector by June 2014. Indonesia is forecast to produce 3.205 million tonnes of the commodity in 2014.
Bank Mandiri will continue to consider financing the small plantations sector to accelerate growth of small rubber industries, said Sunarso. This especially since small plantations account for 85% of the country’s rubber production and, therefore, deserve financial support from banks. “We are confident that Indonesia’s natural rubber industry would continue to grow with the growing demand for the commodity,” he said.
Pricing relief exercise in Malaysia
Malaysia, the region’s third largest natural rubber producer, is regulating rubber prices at the plantation level through a RM6.4 million-funded scheme to be implemented by the Malaysian Rubber Board (MRB).
The mechanism will ensure that rubber smallholders enjoy profits of between RM0.20 to RM0.30 cents/kg, by taking the middlemen out of the trading picture and coursing the rubber trading in some 64 smallholders’ cooperatives.
Plantation Industries and Commodities Minister Datuk Seri Douglas Uggah Embas explained that the mechanism will enable MRB to oversee the daily proposed/reference prices for the cooperatives so that the rubber will be sold at a higher price.
Pseudo-benefits of demand in Indochina
Vietnam, the region’s fourth largest rubber producer with a market share of 11.1% of the global market, is currently contending with low rubber export prices due to declining uptake by its top markets of China (which accounts for about 60% of its export volume) and Malaysia. According to the Vietnam Rubber Association (VRA), the export price of rubber in Vietnam fell by US$500-700/tonne to US$2,000/tonne against last year.
To offset this, VRA has reportedly advised domestic producers to reduce their production this year and to refrain from selling rubber below international prices.
In Myanmar, where rubber cultivation is a means of livelihood for local farm holders, the surging global demand for rubber has resulted in large-scale investors buying land to open up rubber plantations. At its worst, land grabbing is occurring, with large tracts of forest reserves being converted to such plantations. This has also resulted in local inhabitants being displaced from the potential plantation land. According to a 2014 report by UK-based NGO, Global Witness, Myanmar’s land tenure, ecosystem and forests are imperilled with the government’s policies to expand agribusiness, which focuses on rubber cultivation.
Nonetheless, production is high while the price of the rubber is low. Local rubber producers, especially ones that produce inferior varieties, are hardest hit by a growing deficit between production cost and the price, pegged at US$1,700/tonne in June from US$2,600 at the end of 2013.
Moreover, Global Witness also reported on the acquisition of vast tracts of land in Cambodia and Laos for rubber planting by two of Vietnam’s largest companies, Hoang Anh Gia Lai (HAGL) and the Vietnam Rubber Group (VRG). It says that these firms are financed by foreign investors, including Deutsche Bank and the International Finance Corporation (IFC), the private lending arm of the World Bank (WB).
Demand not wavering
Meanwhile, the use of rubber is expanding, especially in tyres and non-tyres segments and this increased demand could also put a strain on the supply of rubber.
According to a World Rubber Market report by research firm Freedonia, tyres account for nearly two-thirds of all rubber demand. Production of nonmotor vehicle tyres, including bicycles, motorcycles, and industrial vehicle tyres will post stronger gains than motor vehicle tyres, especially in the Asia Pacific region. It, however, will show slower sales, compared to the non-tyre segment, through to 2015.
Asia is a key producer of non-tyre rubber products, and it is expected to account for 80% of world market growth in volume terms through 2015, the research firm said, adding that industrial applications like sealing and vibration control will further pad up growth of this segment.
A leading non-tyre item is the disposable medical gloves sector that contributes to growing rubber demand, according to TechNavio. It also forecasts global rubber market to grow at a CAGR of 5.89% and 6.36% respectively on the basis of production and consumption, over the 2013-2018 period.
Meanwhile, the collaboration project of Malaysia and Thailand, the Rubber City, which will be located at the Thai-Malaysian border and is proposed to come on stream next year (fast tracked to an earlier date than the initial plan of 2017), is aimed to boost rubber prices.
It will also provide 20,000 tonnes in additional demand of raw rubber/year and generate industrial investment of 4.3 billion baht. Its rubber output may include rubber gloves, condoms, automobile tyres, rubber hoses, and furniture. Rubber City is intended to support Thailand’s mid and downstream rubber manufacturing as it buffers the country against the erratic global rubber prices.
These developments may be seen to provide a respite to the region’s woes against the cycle of low prices of rubber.
Will the cost/supply situation normalise?
Singapore-headquartered International Rubber Study Group (IRSG), meanwhile, has an optimistic forecast that the global surplus of natural rubber will shrink 46% in 2015, in the light of expanding demand and reduced tapping.
The IRSG says that production will outpace demand by 202,000 tonnes from 371,000 tonnes in 2014 and 650,000 tonnes last year. It says the glut is now contracting as profits decrease for small farmers who represent 80% of world supply, amidst forecasts for record global car sales and boost in tyre demand.
Analyses conducted on rubber have become unanimous in projecting that rapid worldwide demand will continue to outstrip supply. This is echoed by the prognosis of IRSG that by 2020, the demand versus supply gap will reach 10% to 1.4 million tonnes.
But if the situation of supply and pricing does not normalise in the natural rubber sector, it may be that rubber product companies will reach out for other solutions like synthetic rubber alternatives or developing rubber from dandelions or even using guayule, instead of natural rubber.