Trends in natural rubber business

Dr N. Yogaratnam

From the Amazon basin, natural rubber (NR) has become significant industries in the developing economies of South-East and South Asia.

It is a vital commodity used in the manufacture of a wide range of rubber based products. It also plays a major role in the socio-economic fabric of many developing countries. Over 20 million families are dependent on rubber cultivation for their livelihood in the world NR market.

The fundamentals influencing NR prices are demand and supply factors, while all other factors have indirect effects through changes in the fundamentals of demand and supply.

For example, an improvement in the world economy leads to increased rubber demand, a fall in the price of NR relative to synthetics (SR) influences a declining share of SR in total rubber consumption, and a weak currency exchange in the producing countries encourages an increase in exports and concomitant output from these producing countries and hence a rise in world NR supply.

Uncertain weather, including haze, has also affected production.

NR and SR Consumption

International Rubber Study Group’s (IRSG) recent estimates indicate that, global rubber consumption was 21.4 million tonnes in 2009, compared to 22.8 million tonnes in 2008, a decline of -5.9 percent. While significant, this decline contrasts with the growth rate of -12.8 percent reached in July, indicating that consumption is finally starting to recover from the impact of the recent global economic downturn, as the declining rate has come down to -5.9 percent at end December 2009 from -12.8 percent in July 2009.

During the final quarter of 2009, global natural rubber (NR) consumption is estimated to have risen by nearly 0.2 million tonnes, with the decline in consumption growth slowing from -9.7 percent to -6.0 percent. Over the same period, global synthetic rubber (SR) consumption is estimated to have risen by 0.4 million tonnes, with a decline in consumption growth slowing from -13.6 percent to -4.9 percent.

The price of light crude was around US$77/barrel in the five months to March 2009, but subject to strong fluctuations (peaking in early January at US$83.18/barrel and hitting the floor in the middle of December at US$69.51/barrel).

Now it is in the region of US$86 a barrel. The butadiene price, however, mostly ignored the oil price, once again.

NR and SR production

Global rubber production was 21.8 million tonnes in 2009, compared to 22.8 million tonnes in 2008, a decline of -4.6 percent; however, this contrasts with a growth rate of -11.2 percent reached in September, indicating that output is starting to recover as consumption rises.

Global SR production was 12.2 million tonnes in 2009; while this is 4.8 percent lower than in 2008, the global NR production was 9.6 million tonnes in 2009, 4.3 percent lower than in 2008.

NR output trends

Contrary to earlier expectations of a decline in Thai out-put due to adverse weather conditions, the latest data suggest that, following a marked upturn in the final two months of the year, NR production reached almost 3.1 million tonnes, a similar level to 2008.

Estimates for Indonesia point to a 7.9 percent decline in NR out-put in 2009, mainly due to a shortfall in the first half of the year, while in Malaysia production fell by 20.2 percent due to the combined impact of heavy rains and a shortage of tappers.

A number of the smaller Asian NR producers saw an increase in NR output in 2009 compared to 2008, including China, Vietnam, Sri Lanka and Cambodia. At the regional level, Africa was the sole producing region in which NR production was seen to be growing. Table 1, presents the final estimates of NR production in the top ten producing countries.

Table 1

Natural rubber production

(‘000 tonnes) and Yields (Kg/Ha)

Country 2007 2008 2009 Yields (2009)
Thailand 3056 3090 3086 1725
Indonesia 2755 2751 2535 1004
Malaysia 1199 1072 856 1450
India 811 881 817 1753
Vietnam 606 660 724 1720
China 590 560 630 1053
Ivory Coast 183 194 206 1559
Sri Lanka 117 129 133 1375
Brazil 116 123 104 900
Philippines 93 95 87 NA

Total World 9801 10031 9602

NR production in Sri Lanka in first quarter, 2010 (January/March) has gone up by 11.6 percent, from 37.9 in 2009 to 42.3 in 2010 (‘000 tonnes). If this trend continues, NR production in Sri Lanka would be in the region of 148.4 (‘000 tonnes) in 2010.

Yet, we will continue to remain in the 8th position as global producer and in terms of productivity, Sri Lanka is still in the seventh position (Table 1).

SR production trends

While SR output continued to stage a recovery across all regions over the final quarter of 2009, the fact that only Asia recorded positive growth by the year end (at 6.0 percent) underscores the extent of the slowdown experienced earlier in the year, when production was cut back to levels not seen for over thirty years.

NR and markets

The production and consumption data suggest that the NR market moved to a modest surplus of 55,000 tonnes in 2009, following the deficits seen in the previous two calendar years.

Global NR stocks are estimated to have remained below 1.1 million tonnes on an annual moving average (AMA) basis since the final quarter of 2008 (Table 2)

Table2

NR Balance (2009)
Parameter 2007 2008 % Change 2009 % Change
NR Production 9801 10031 2.3 9602 -4.3
NR Consumption 10224 10154 -0.7 9547 -6.0
NR Balance -423 -123 55

Following a slump earlier in the year, and the subsequent recovery in the final quarter, SR production and consumption ended in 2009, around 5 percent down on the previous year, similar to the market situation seen at the same point in 2008.

NR and SR stocks

Global NR stocks are estimated to have remained at around 1.5 months’ consumption since the beginning of 2008 on an AMA basis; in the case of SR, the data suggest that the equivalent ratio has risen since the final quarter of 2008, mainly in response to the steeper decline in consumption relative to production.

NR trade

World NR exports contracted by 7.2 percent in 2009, in volume terms around 486,000 tonnes, the sharpest annual decline in exports since the end of the Second World War.

The main explanation for this fall in exports was the simultaneous reduction in aggregate demand across the major world economies.

The longer-term export trend largely reflects the trend in production, but also reflects any accumulation in producer stocks as well as increasing downstream processing activities in the producing countries, resulting in rubber being exported in manufactured form.

Recent NR exports

Focusing on the major producing countries, NR exports contracted sharply in Malaysia and Indonesia in 2009 compared to 2008, while Vietnamese exports increased rapidly on account of robust exports to China, especially in the second half of 2009; Thai exports remained steady, showing a marginal increase in 2009 compared to 2008.

The sharply declining trend seen in exports from the major producers in the first three quarters of 2009 appears to have been arrested in the fourth quarter.

Across major producers, Malaysian and Indonesian exports shrunk by 23.2 percent and 12.8 percent respectively in 2009 compared to the previous year while Vietnam showed an increase of 11.1 percent.

Across the major producers and types of NR, the individual trends reflect that of the overall export trend. Trade data imply that TSR exports fell by 17 percent in 2009 compared to the year end exports in 2008, although there is seen a decleration in declining trend. In Indonesia, the leading exporter of TSR, the volume of exports has contracted by 11 percent, while Thailand and Malaysia saw their TSR exports fall by 28 percent and 21 percent, respectively, over the same period.

The recent trade data imply that RSS exports were down by almost 26 percent compared to export volume in 2008. Thailand, the leading RSS exporter, saw a fall in exports of 16.5 percent while Indonesian RSS exports fell by 42 percent over the same period. A more pronounced reduction in RSS exports compared to TSR could be attributed to the sharp decline in NR imports by Japan, a major importer of RSS, and the price premium of RSS over TSR.

Irrespective of the rapid decline in exports of solid forms of NR, latex exports saw an increase in 2009 compared to the volume exported in 2008. The latex export trend reflects the extra of demand generated for latex products.

The latest data on export volumes of selected latex general rubber products from the five leading exporters appear to show an overall upward trend going into 2010.

Four out of the five sectors have continued to retain their upward trend, with other pharmaceutical goods being the only sector still on a downward trend.

Tyre sector

The main outlet for rubber is in association with the automotive industry with tyre sector consuming in the region of 65 to 70 percent of NR produced in the world.

Tyre sales, is the sum of original equipment tyre sale and is linked to the number of vehicles produced and replacement tyre sales is linked to the number of vehicles on the road.

In the sale of passenger car tyres (number of units), the change in sales had been -3.9 percent growth in 2009, but forecasted to be 10.9 percent growth in 2010 and 5.8 percent growth in 2011. In the case of light commercial vehicle tyres, the change in growth had been -3.5 percent in 2009 but forecasted growth in 2010 is 11.2 percent and 8.1 percent in 2011.

The change in the medium heavy commercial vehicle tyres growth had been -7.6 percent in 2009 and forecasted sale is 15.4 percent growth in 2010 and 8.5 percent growth in 2011.

NR Prices

The upward trend in NR prices that prevailed during Q4, 2009 continued into 2010, extending up to end May 2010.

The factors that underpinned the price gains in the physical market appear to have been driven by robust demand and tight supply conditions.

In any case, NR is likely to be dearer for some more time, but its long-term fortunes are dependant on the pace of the global economic recovery and stability of weather conditions.

The boom in the automobile sector across the globe, especially in countries like China and India, augur well for NR demand.

But much depends on the strategies that have been boosting the auto sector across the globe.

It has also been said that the current auto boom could not be taken for granted and there can be over-riding economic factors that decide the prospects of the industry and, consequently, the fortunes of rubber.

New plantings

It has been reported that, between 2005 and 2008, a dramatic increase in total new planting took place in the Asia Pacific Region with more than one million hectares planted. Current market boom may stimulate a further surge in new planting area, as was seen in the 2005 - 08 period.

Normal production on a global basis will increase by 30 percent in 2015 and 50 percent in 2020 over 2008 levels respectively. Global NR production is projected to reach 13.2 million tonnes by 2019.

It has been highlighted in a previous article that climate change and its impact on NR production have emerged as a serious concern as these have resulted in a fall in production in most of the major rubber producing countries of late.

As reported earlier, in Malaysia alone, climate vagaries have caused NR productivity to come down by about 3 to 4 percent and prolonged the immature period of new rubber plants from 6 / 7 years to 7 1/2 to 8 years. This could be the general trend in all the rubber producing countries.

Road Ahead

The world rubber economy depends heavily on world economy. With China being the leading consumer of both natural and synthetic rubber, its production and demand patterns will continue to have a major influence on the global rubber industry growth, besides the fast growing Indian rubber industry.

In the latest outlook, the world total rubber consumption forecast for 2010 indicates demand to be around 24.4 million tonnes, further increasing in 2011 to 26.0 million tonnes.

The demand for NR is forecasted to be 10.41 million tonnes for 2010, and increasing by 5.1 percent in 2011. NR production in volume is forecasted, to be 10.64 million tonnes in 2010.

According to an ANRPC forecast, tight NR supply would remain an issue amid an upsurge in demand from China and India for their booming auto and tyre manufacturing industries.

Also, there is the possibility of technological breakthroughs that may bring down the usage of NR in tyres and other rubber goods. Research for viable substitutes for NR also may get intensified if the NR shortage becomes acute and price moves up to unaffordable heights.

There is no denying the fact that NR is currently witnessing an unbridled boom. But whether it will turn into a bubble, as was seen two years ago, is dependant on several factors, some of which are beyond the control of the industry or its players. So it is time for all stakeholders in the rubber industry to play it safe and with utmost vigil.

The Sri Lankan NR industry may have to have a fall-back strategy in place to keep themselves afloat in case of another sudden crash in NR prices eg. crop diversification, enhanced value addition, improved marketing systems, innovative production technologies and governmental support for smallholdings.

The extremely low NR prices experienced in turbulent years of the economies in Asia, have contributed to increased rural poverty in many countries, especially rubber smallholders in Asia, including Sri Lanka.

(Reference: IRSG Report, Jan/Mar, 2010)