Natural rubber business to bounce back

Dr N Yogaratnam -Chairman Tree Crops Agro Consultants

The global rubber business that experienced a slump in 2008 as a consequence of the world economic downturn has shown signs of modest recovery, although the demand and supply positions are yet to stabilize. The natural rubber (NR) market had been positive with Malaysian SMR 20 being around US$ 170 to 175 during the first half of June 2009 in the international market and Sri Lankan crepe rubber fetching around US$ 2.00 at the Colombo auctions more recently.

Rubber production

International Rubber Study Group's (IRSG) latest estimates show that global output of natural rubber (NR) and synthetic rubber (SR) has fallen from moving annual total (MAT) of 22.7 million tonnes at the end of 2008 to 21.8 million tonnes in March 2009. The year-on-year (YoY) rate of decline in production accelerated from -2.0 percent to 6.5 percent over the same period.

The sharp reduction in total rubber output is believed to be mainly due to a steep decline in world SR output which fell to an estimated moving annual total (MAT) of 12.2 million tonnes in March 2009 compared to over 12.8 million tonnes in December 2008.

Global NR production is estimated to have fallen, though less markedly than SR from 9.9 million tonnes at the end of 2008 to 9.6 million tonnes in March 2009. Output in the largest NR producing region, Asia, is forecast to fall by 3 percent in 2009.

However, output in the newly emerging NR producing countries like Vietnam, Cambodia and Myanmar is projected to increase, reflecting the expected area expansion in the region. African and Latin American supply is also forecast to rise in 2009 by 2.9 percent and 4.2 percent, respectively.

The Association of Natural Rubber Producing Countries (ANRPC) in its latest bulletin also states that NR production in major producing countries continued to fall during the months upto May this year.

In Thailand, which accounts for 33 percent of the global NR supply, production fell annualized 21.6 percent during the first four months of this year, according to the bulletin. NR production of Indonesia, world's second largest producer of NR, accounting for 28 percent of the global production, the output fell less sharply in the five months ended May, 2009.

NR output of Malaysia fell 27.6 percent in the five months ended May 2009 from a year earlier, which is believed to be due to rains that slowed tapping activity, low export demand, and an ongoing replanting program. Latest official statistics states that in April, NR production of the country stood at 55,690 tonnes registering a 24 percent decline compared to the same month in the previous year.

Production in Vietnam fell 21.7 percent in January-May from a year earlier largely due to replanting and the resultant shrinkage in tappable area by 16,700 ha in this year. The Vietnam Rubber Group anticipated a 9.8 percent fall in production for the three months ending August 2009. Meanwhile, India's NR output fell annualized 8.7 percent in the first five months of this year caused by unusually severe drought in the traditional rubber growing region of the country. The pace of output fall was anticipated.

China and Sri Lanka

While NR output fell sharply in all major producing countries, China and Sri Lanka stood exception to this; the NR output of China rose annually 137.9 percent or 2.4 times in the five months ended May 2009, as reported by the China Rubber Research Institute in Hainan. The production anticipated for June is 71,000 tonnes, showing a 18 percent rise from the same month in the previous year.

eanwhile, Sri Lanka's NR output rose 9.7 percent in the five months ended May 2009 from a year earlier. It is anticipated that the production would grow annually 9.4 percent for the three months ending August 2009.

The seven ANRPC members, Thailand, Indonesia, Malaysia, India, Vietnam, China and Sri Lanka account for 93 percent of the global NR supply, to moderate to 2.5 percent for the three months ending August, according to the Rubber Board of India.

Rubber consumption

On account of the rapidly deteriorating state of the world economy, it has been reported that total global consumption in 2009, up to March is estimated to have come down to 21.1 million tonnes, its lowest level since April 2006.

Year-on-Year consumption growth plunged to -9.4 percent, compared to -3.2 percent at the end of 2008 and 6.9 percent in March 2008.

In China, the world's largest consumer accounting for about 30 percent of global demand, consumption growth was -3.1 percent in the period upto March 2009, in contrast to a Year-on-Year growth of as much as 14.4 percent twelve months earlier. Demand continued to decline among the other major Asian consumers, notably Taiwan (-30 percent) and Korea (-14 percent).

Meanwhile, according to the China Rubber Industry Association (CRIA), rubber demand in the country will go up by 8.5 percent touching 6.4 million tonnes by 2010, fuelled by the anticipated growth in the auto sector.

The global NR consumption on a moving annual total (MAT) basis is estimated to have declined by over 0.4 million tonnes between December 2008 and March 2009.

Total global NR consumption is projected to fall by -5.1 percent (or around 500,000 tonnes) in 2009, according to the latest projections of IRSG. The largest consuming region, Asia, is forecast to suffer only a marginal fall in consumption in 2009, sheltered by two of the most vibrant economies in the world - China and India - and by the presence of significant NR consuming NR producers namely: India, Indonesia, Malaysia and Thailand. By 2010, the demand for NR in Asia is forecast to increase to 6.67 million tonnes.

Meanwhile, global SR consumption is estimated to have fallen by over 0.7 million tonnes during the period. Latest IRSG report adds that global SR consumption is estimated to have plunged by -11.3 percent in the twelve months ended March 2009.

SR Share

The global percentage of SR to total rubber consumption, which averaged around 57 percent in 2006 and 2007, declined by almost 1 percent in 2008, with a further fall seen in the first quarter of 2009.

This is mainly attributed to the declining trend seen in the North American SR share.

Within Asia, the SR share has been falling in a number of countries including Korea, Thailand and Malaysia.

NR export

Export of NR fell steeply in all the three major countries Thailand, Indonesia and Malaysia during the initial months of 2009. Export fell annualized 14.6 percent in the four months ended March for Indonesia and 31.9 percent in the five months ended May for Malaysia.

Export from Malaysia is anticipated to fall 6.4 percent for June 2009 from the same month in the previous year, according to ANRPC. Vietnam's NR export fell only 3.2 percent year-to-year in the current year upto May. Export from Vietnam for the three months ending August 2009 is anticipated to fall 5 percent from the previous year.

Meanwhile, according to IRSG, in Malaysia, exports fell by 40 percent in January-March 2009 compared to the same period in 2008, while exports by Indonesia and Thailand dropped by 17 percent and 14 percent, respectively.

NR imports

Among the five major NR importers, the sharp drop in imports continued in the first quarter of 2009, reflecting the continuing slump in demand. NR imports by China, Japan and the EU fell by 25 percent, 22 percent and 37 percent, respectively in the first quarter of 2009 compared to same period in 2008. Imports by all the major latex importers declined in the first quarter of 2009 compared to the first quarter of 2008, expect in the case of China.

NR productivity

India continues to top in average yield of NR, measured in terms of annual production per hectare of tapped area among ANRPC member countries followed by Thailand, Vietnam, Malaysia, Sri Lanka, Indonesia and China

In 2008, India had an annual per ha yield of 1,911 kg, Thailand 1,711 kg, Vietnam 1,661 kg, Malaysia 1,430 kg, Sri Lanka 1,360 kg, Indonesia 1,004 kg and China 1,000 kg.

It is projected that India will continue to retain the top position in 2009 with a little reduced per ha yield of 1,846 kg followed by Vietnam (1,700 kg), Malaysia (1,450 kg), Sri Lanka (1,319 kg), China (1,150 kg) and Indonesia ( 1,003 kg). The estimate for Thailand is not available.

It has been reported that in India, the estate sector yield is much lower than that of small holdings, being between 1300 and 1400 kg/ha. This falls short of the Indian clones average productivity by about 650 kg/ha. But in Sri Lanka, it is the reverse with estate sector yields in the region of 1500 - 1600 kg/ha and the small holdings yield much lower.

NR Market

Global NR market has been going through a slight downfall in the recent past. During May and the early part of June, the market was around US$ 1.7 and 1.75 per Kg respectively for RSS3 and TSR 20. The price has come down to fluctuate around US$ 1.6 towards the end of June. This is mainly owing to a better flow of rubber to the market consequent to the dry winter coming to a close in South East Asia and resumption of tapping being in full swing.

But, oriental rains have subsequently affected NR production in Thailand, Malaysia and Indonesia. Therefore it has been felt that there is no need to implement the export cuts to rubber prices. The International Rubber Consortium (IRCo) had called upon its three major rubber producing members Malaysia, Indonesia and Thailand to cut exports by a total of 915,000 tonnes in 2009. The three countries had cut 27 thousand tonnes in rubber export in the first quarter of 2009. The IRCo has, after a review of the supply situation, proposed a further combined cut of 48,000 tonnes per month for the second quarter of 2009.

Nevertheless there is also a fear of an impending drought in the major rubber growing South East Asian region. If this becomes a reality, rubber supplies from the region may further decline and cause international market price to rise.

It is encouraging that the Sri Lankan rubber business is showing signs of recovery with sheet rubber fetching around Rs.125 to Rs. 225 per kilo while crepe rubber being around Rs. 230 per kilo at the Colombo auctions recently, an overall price increase of about 30 percent.

Global Economy

IMF expects only a weak recovery in 2010. However, the emerging economies like China and India are expected to weather the current slowdown and remain positive.

Almost two months after the release of the IMF report, the world economy is heading into the second half of 2009 with signs that the worst may be over. Based on these reports, the world GDP is projected to register a negative growth of -1.3 percent and make a 1.9 percent recovery into 2010.

The European economy is also showing signs of stabilisation after shrinking at the fastest pace in at least 15 years in the first quarter of 2009 raising German and French business confidence, according to the reports.

India's economic recovery is expected to be sharper and swifter once the world economy starts to recover from the global financial crises of 2008. Some sectors that have already shown initial signs of recovery include FMCG, capital goods, cement and steel and automobiles.

China's economy is expected to grow 8 percent this year and achieve more than 9 percent annual growth by 2011. JP Morgan in its latest report has boosted its estimate for China's economic growth this year to 7.8 percent from a previous estimate of 7.2 percent and its 2010 estimate to 9 percent from 8.5 percent. The Organisation for Economic Cooperation and Development on June 24 raised its forecast for this year 7.7 percent, up from a 6.3 percent forecast in March, and to 9.3 percent in 2009.

The World Bank on June 18 also increased its estimate for China to 7.2 percent in 2009, up from a 6.5 percent forecast in March, and advised policy-makers to delay until 2010 any additional stimulus plan.

Outlook

There is optimism among rubber producers that with the economies in America and Europe joining Asia in showing signs of recovery, though very modest, demand for rubber may start reviving. The sooner it happens, the better for the NR industry, which in any case is expected to recover by 2010.

If the US and world economies recover fully, the role of speculative elements in the global commodity markets will come down and the markets may move more on demand and supply fundamentals, bringing down the volatility in prices. This may bring in positive effects in the rubber market as well and reduce volatility in futures and the physical trades.

The recent economic slowdown that throttled the rubber industry, causing rubber prices in the world market to slump by more than 50 percent, had a negative effect on NR production in Sri Lanka. Nevertheless, over the past few months, from about the second quarter of 2009, prices began an upward movement, which culminated in the Net Sale Average (NSA) per kilo being around Rs.230 and the cost of production (COP) at the estate level still being much lower.

This is indeed a happy position to be in and all indications are that these price levels would be sustained and perhaps improved in the weeks and months to come. This dispels the erroneous perception that the NR, globally and nationally is a sun set industry.