Global natural rubber market to remain volatile

Speculation more dominant than weather pattern

By N. Yogaratnam PhD (London) Consultant, National Institute of Plantation Management
Recent estimates of the International Rubber Study Group ( IRSG) indicates that the total rubber consumption in the first seven months of 2007 has increased to 22.07 million tons, the growth rate being from 2% to about 4%, on year-on-year growth basis during the seven-month period.

Asia-Pacific continued to lead in growth, with increase in the region of 8.3%. The sharp growth in Asia-Pacific comes not only from China but also from Malaysia, Thailand and Indonesia.

The relatively rapid growth in Natural Rubber (NR) as compared to Synthetic Rubber (SR) consumption, has increasingly become evident in recent months. Global NR consumption is estimated to have reached 9.62 million tons, a growth rate of 5.3%, while SR reached 12.45 million tons, a growth rate of 3%.

NR Production
Sharp recovery in the growth rates in the top producing country, Thailand, combined with already high growth in other major NR producing countries, have contributed to the recent rise in global NR output, except in Malaysia, where the rate fell from 15.8% at the beginning of the year, to 2.2% estimated in July. The year end NR production is forecast to be around 1,267 tons, as against a production of 1,284 tons in 2006.
Thailand is expected to lead with a production of 3255 million tones closely followed by Indonesia with 2707 million tones and India 865 million tones. Sri Lanka’s total production is forecasted to be around 112 million tones at an average 3% increase over 2006.

Thailand has identified about 2.408 million hectare (ha) classified as suitable areas to grow NR and about 4.729 million ha as marginal areas. The suitable areas, according to their classification, are those that could be tapped within seven years, and with a production of more than about 1560 kg/ha/ yr.

Although, Sri Lanka has programmed to grow rubber on 40,000 ha in Hambantota, Moneragala and Badulla divisions, areas available and suitable to grow NR, in accordance with Thailand’s classification, would be much higher than 40,000 ha.

Another NR producing country, Cambodia, has about 500,000 ha of land with soil condition ideal for rubber growing and 70,000 ha devoted to rubber cultivation. The Cambodian government estimates that by 2015, the replanting area in total can be up to 150,000 ha, and production expected to increase by 150,000 tons.

Supply / Demand
With higher growth rates of supply over demand, deficit in the NR sector, continues but, at a declining rate, from 452,000 tons to 328,000 tons in the first seven months. For SR, growth rates of supply continue to be greater than demand, further increasing the surplus.
In any case, it is the relative stocks to level of consumption, which is an important factor influencing rubber prices. For NR, despite the recent upturn, the stock:consumption ratio is still very low and hence, exerting pressure on NR price to remain high. For SR, it is the high cost of production influenced by high oil prices, which is currently on an increasing trend, a major determining factor in addition to the stock:consumption levels.

As oil prices rise, reaching a peak level of around US$ 79 pbl in New York, and SR feedstock have been tight in most major markets, it is not surprising that SR prices have remained at a recent high. However, it has been reported that SR prices have continued to be lower than its NR counterpart in both the USA and Europe; New York TSR 20 price was almost 30% above the price of SBR 1502.

NR Market
NR prices have been somewhat disappointing since the end of May, removing recently, all the gains made over the first five months of 2007. The CIF value had been around US$ 2.16/kg and the FOB around US$ 1.98/kg. Market sources attribute the upward performance during five months to May, as a reflection of the disruptive supply condition brought on by, on the main, adverse weather condition in the main rubber producing region of Southeast Asia. Thus, the relatively sudden and sharp reversal in the price trend from the end of May, could be taken as being an indication that the market is convinced that there will be smooth supply of NR, with sufficient quantity coming to the market, at least in the near future.

The sudden and sharp price drop, also indicates that there may have been more than just unfavourable supply condition behind it. It appears to suggest a large presence of speculative element, according to IRSG. Moreover, no substantial changes have also being noted at the global level for demand.

NR forecasts
Global rubber consumption is forecast to increase from 21.41 million tons in 2006, to 24.20 million tons by 2009, at an annual growth rate of 4.2%. NR consumption is forecast to rise from 9.22 to 10.66 million tons or 4.7%, as compared with an increase of 3.7% a year from 12.18 to 13.61 million tons for SR. Global NR output is forecast to show a rise from 9.68 to 10.72 million tons, at an annual growth rate of 3.5%.
Global NR demand:supply equation forecasts sharper growth rates of consumption to production, expected to bring the surplus further down but, global stocks, according to IRSG, will continue to rise during the next three years.

NR Market Volatility
NR has been a commodity traded in open markets. As such, it is always subject to influence by both fundamental and speculative factors clearly evident from the strange volatility in prices for the last several months. Weather pattern being seasonal and predictable to a certain extent, although the timing and the duration will vary from country to country, is, therefore, less likely than speculation, in creating violent fluctuations in rubber prices. This would continue to hit rubber goods producers and the general consumers, quite hard.

Another factor of concern is that the high prices induce an enhanced tempo of fresh planting in countries such as Thailand, Cambodia, Vietnam, China etc. This may eventually lead to over-supply and a decline in NR prices on a long-term basis but, less volatile market
Domestic Scenario

Rubber prices at the Colombo Auctions are expected to remain around Rs. 225 to 250/kg, although, Sri Lanka being known to account for less than 2% of global production and supply, will not have the ability to influence world prices. Nevertheless, the sustainability of the rubber industry can be assured by adopting a two-pronged strategy, involving short-term and medium/long term.

The short-term aspects would include enhanced production efficiency in terms of human resources, in an effort to increase productivity and contain cost of production. These could be achieved by enhanced productivity management, harvesting productivity and processing productivity. In improving worker productivity, a combination of effective management, better skills and improved knowledge, positive attitudes etc., would go a long way to upgrade an average worker into a top performer.

Medium/long-term strategies centre around land productivity in terms of output per unit of land, with increased replanting and development of degraded and marginal land, etc.

These would inevitably lead to the concentration of output and its market share, exploitation of economies of scale, reducing fixed costs and containing overall cost of production. Continuous effort at value addition, which has shown a significant growth since 1991, should be made, thereby transferring rubber from a “Commodity” to an industrial product.

The plantation model of rubber cultivation in the modern context, should be that it helps to transform traditional agriculture into a truly agri-business encompassing high–tech farming, capital intensive technology, strong commitment to technological changes, value addition etc.