Natural rubber price upswing for how long?

Dr N Yogaratnam

The upward trends in natural rubber prices in recent times with record breaking values continue to be a hot issue. The trend is being watched with bated breath by the suppliers and consumers alike for contrasting reasons

Experts and stakeholders of the industry unanimously rule out a major slide and are of the view that prices are likely to stay high till the next few years with intermittent dips.

Natural rubber has never witnessed such a boom as it is happening now, at least in the last few decades. The price of NR has broken all recent records driving on supply shortage as against the ever growing demand mainly from the tyre industry, the largest consumer of NR.

But the crucial questions are: For how long? Is the current upswing based on fundamentals like actual demand and supply? Is there a chance of a price crash?

Experts and stakeholders of the NR industry agree on one thing - the prices are here to stay at higher levels at least for the next two to three years and a major price crash is not in sight.

Price to stay high

Prices of natural rubber will continue to remain quite high well into 2011.The effect of new planting during 2005-2008 will presumably result in somewhat lower prices starting from 2012 onwards, but it is most unlikely that prices will collapse.

Sri Lankan rubber industry is also expected to continue to benefit from this market boom.

It is believed that according to the present indications and available data plus market trends, the prices are likely to soften further.

Therefore the rubber growers will not be unhappy in the next two to three years, which means that the prices will continue to rule at comfortable higher levels at least as far as growers are concerned.

The Association of Natural Rubber Producing Countries (ANRPC), which is known for its reliable and authentic perception of the NR scenario, notes that NR prices are of late showing trends of somewhat cooling down after its amazing bull run.

This means that the prices are set to stabilize based not only on pure fundamentals like demand and supply but also on a host of factors including climate change, currency volatility and speculation.

According to ANRPC statistics, global rubber prices have only fallen of late. RSS3 price in Bangkok fell from US$ 3.52 on July 1 to US$ 3.17 on July 23.

But in Kottayam, the price has been on the rise making a wide gap from other markets.

The gap is likely to be narrowed down as monsoon season ends in the Kerala State by the end of September.

Indian scenario

Meanwhile, in a recent development, the Indian Commerce Ministry, which has earlier decided to reduce the import duty on NR from 20 percent to 7.5 percent apparently on persistent demand from the rubber products manufacturers, mainly tyre industries, has now decided to introduce a maximum ceiling of Rs 20.46 a kg, owing to intense political pressure and growers' resistance, while retaining the duty as such.

This Rs 20.46 a kg cap is what exactly an expert panel constituted by the Government on a court directive, had recommended.

The news of an import duty cut had already put brakes on the soaring NR prices in the domestic Indian market on the soaring NR prices in the domestic market which had shot up to as much as Indian Rs 186 a kg of late while the international prices showed a softening trend.

The Indian growers are worried that allowing import at a lower duty would lead to massive dumping of NR from abroad which, in turn, would lead to a price crash in the domestic market.

But the Indian Government says the measure is intended to bring down the domestic NR prices on a par with the international prices which is in the best interests of both the growers and manufacturers.

Sri Lankan scenario

NR prices rose by 81 percent to an average of US$ 3.27 per kg in August this year compared to 2009.

At an auction in Colombo in the same month this year, prices hit an all time record, with a kilo of crepe rubber fetching Rs 526 and this up-ward trend continued into October with a kilo of the same grade fetching Rs 575 .

However this trend seems to have not been maintained and prices came down to Rs 450 per kilo before going up again to Rs 475, then to Rs 525 and in the last week of October to Rs 540 per kilo.

The period from October until January next year is the season of peak NR production in Sri Lanka. In any case it is most likely that the prices would stabilize around Rs 475 to Rs 500 as supply is not the only factor that governs prices as was seen in 2008 (Figure 1).

The highest ever prices were recorded in June 2008, but it declined sharply in October of the same year although there had been no major shift in NR supply.

The country's export earnings have shown an increase in the first half of 2010 when compared to corresponding period in 2009, purely due to escalating NR prices in the global market.

As the bulk of rubber production in the country is consumed by the domestic rubber products sector ( about 80 percent), the benefits of improved export earnings remain restricted.

NR supply

ANRPC has pointed out right from 2007 on wards, the supply tightness is expected to continue until 2011.

The supply after 2011, of course, depends partly on farmers' decision on replanting of their aged trees.

Age structure of rubber trees in most of the producing countries indicates possibility of large - scale replanting drive from the beginning of the next decade (2011-20).

This indicates a possibility of shrinkage in yielding area until the replanted trees attain yielding stage.

Severity of labour shortage is likely to prompt rubber farmers, especially in Malaysia, to shift to labour saving crops such as oil palm for which the gestation period is much shorter.

On the other side, there would be new supply from 2012 onwards. A large extent of area was planted from 2005 onwards in response to attractive prices. A total extent of 2.441 million hectare is estimated to have been planted (new-planted or replanted) during 2005-2010 period - in Thailand (0.927 million), Indonesia (0.435 million), China (0.323 million), Vietnam (0.319 million), India (0.196 million), Malaysia (0.130 million), Cambodia (0.010 million), Philippines (0.069 million) and Sri Lanka (0.032 million). There has been large-scale planting in Myanmar, Laos, Cote d I'voire, Nigeria and Liberia which are countries yet to come under ANRPC's umbrella.

Depending on the net effect of the above two opposite processes, there could be a shift in the supply curve after 2011.

Price crash not imminent

ANRPC however, feels that the NR industry had a period (For e.g., April-August 2008) in which rubber market inflated without supported by demand-supply fundamentals, taking cue from speculative boom in entire commodity markets and even metals. But, the current recovery in rubber prices is driven by strong market fundamentals rather than speculation.

They add that demand-supply fundamentals at least until 2011 are likely to be favourable for rubber prices to stay high. But, it is unrealistic to judge rubber prices on the basis of demand and supply alone.

There are other factors influencing the rubber market, such as crude oil price, Japanese yen, currency strength of rubber exporting countries, commodity speculation etc.

However, possibility of a price crash in the coming years is remote provided Asian economy stays strong.

There are actually multiple reasons behind the unusual and alarming rise in natural rubber prices over the course of the past year. However, the major reason is the gap between demand and supply. Not just in one country, but globally, there is a demand-supply gap which is increasing every day. This is fuelled to some extent by speculation, especially in India where the rubber consuming industry is already facing the import barrier in the form of higher Customs duty to the tune of 20 percent.

While the current good tidings in NR prices are more than soothing to growers due to the sudden spurt in income from their good old rubber trees, it is ironically hitting the NR consuming industry, mainly the tyre industry, quite hard.

Tyre industry's worry

Responding to the impact of the higher level of NR prices, the tyre industry feels that, tyre, and nearly none of the natural rubber consuming industries enjoy healthy profit margins. What this means is even thinner margins for the consumers.

It is not possible for the NR consuming industries to pass on all the costs since the burden would be too high. Lower profits in such a scenario have larger implications on fresh investments in research and development and higher capacity.

According to this industry circle, the options before the consuming industry, especially tyre industry, is basically of tightening the belt even more, cutting back on any expense which is not absolutely necessary and also sweating all the assets to try and bridge this gap as much as possible.

The other option is higher investment in research to try and find ways of replacing natural rubber with synthetic rubber wherever possible, without compromising any fashion aspects of safety, performance and regulations.

It is the view of the industry that it is difficult to predict how long the NR price will continue at higher levels. But any major economic factor could affect prices, say for example, a slow-down; what we really need is long term action; which means investment in a fresh crop, increasing the acreage under cultivation, replacing older crops with newer ones.

Simultaneously, we have to look at ways and means of replacing natural rubber usage in tyres and allied items with synthetic rubber.

Prospects of NR substitution

On the question of substitution, it is said that, it is possible to substitute natural rubber under certain conditions, but in Asian countries, where the high ambient temperatures persist, substitution is not possible after a certain point. It is easier in tyres that are used in colder climates like northern Europe and North America.

Meanwhile, the NR industry doesn't anticipate a significant drop in NR use following new tyre-making technologies, including new compounding. So far, experts do not yet foresee a significant drop in NR use: potentially only a somewhat lower growth, there are no developments on the SR side which would have considerable impact on the NR market.

Regarding prospects of NR substitutes like Guayule, it is produced on a small scale and we do not yet foresee large-scale production, although very high NR prices will definitely help.

Meanwhile, ANRPC says that substitution between NR and SR is largely a theoretical perception having limited practicability.

For instance, substitution in favour of NR was marginal in 2000 in spite of a much lower price for NR compared to SR. Rather than relative price, it is technical considerations that determine the proportion of NR and SR in a product. For example, truck radials need NR in a much higher proportion than SR.

But, this is just the opposite in the case of passenger car radials. Technical considerations often put cap on the flexibility available for substitution between NR and SR.

Moreover, whenever NR demand rises, SR demand also rises because the two elastomers are together used in the manufacturing of most of rubber products.

Enhancing production

With regard to the NR price trend, the most crucial factors will be whether there will be enough planting, how will productivity develop, will the number of workers be sufficient, what will be the effect of climate change and will the disease side be under control.

Meanwhile, ANRPC prefers to describe the current uptrend in prices as a sort of a recovery of NR prices which, is mainly driven by supply constraints. ANRPC in 2007 itself foresaw the possibility of a tight supply during 2007-11.

This has been due to major reasons like the increase in proportion of low yielding aged trees in the total yielding area of all major producing countries and slow expansion in yielding area, especially from 2006 onwards.

Total yielding area in the ANRPC member countries expanded only at a marginal annual rate of 0.8 percent, from 6.788 million ha to 7.000 million ha, during 2006 to 2010. This is due to the slow rate of planting undertaken during the period 1999-2003 coincident with low rubber prices.

Commenting on the extension of rubber planting to low yielding traditional areas, ANRPC says that this is due to a shift in policy orientation of producing countries from maximizing rubber output to maximizing farmers' profit and competitiveness.

Pointing out that this shift is not production-oriented, it says that popularization of latex-timber clones and low-intensity harvesting systems also largely reflect profit-oriented strategies rather than production-oriented ones.

A marked deterioration in efficiency of harvesting due to severe shortage of skilled trappers also affected output in major NR producing countries, says experts and analysts.

While agreeing that climate also has affected the supply, the impact of climate change on NR supply need not be one-directional.

For instance, less number of rainy days in June/July helps to have more harvesting days and a better yield. This also helps in reducing incidence of fungal diseases.

Futures trading

Regarding futures trading as a method to avert market uncertainty, IRSG says that it could be one among the various measures that might be very useful to reduce short-term price risk.

It cannot cure more structural shortages or surpluses in the market.

Meanwhile, what is needed is a kind of controlled futures trading in rubber so as to ensure better price realization.

The slower growth rate of NR production capacity the world over is the result of low levels of planting after the Asian crisis in 1997 stretching well into the first decade of this century.

Outlook

There are three main groups of factors that determine the outlook for prices. They are: First, economic growth which impacts vehicle, tyre and rubber consumption scenario, including the effect of availability of oil on vehicle usage and sales.

Second, the impact on NR production potential scenario as a result of planting policy implementation, productivity improvements and labour availability, including the influence of climate change on NR production.

Third is the effect of oil price, which will affect butadiene-SR scenario. One has to see the availability and how this will affect prices.

On the economic front, the future looks a lot better than in early 2009. However, there are still many uncertainties which may lead to a slower recovery in parts of the world, e.g. Europe, and lower growth in high-growth countries. This may spoil the good outlook for rubber industry to some extent.

Another point is, the massive new planting by rubber farmers during 2005-2008. This will have a significant effect on the supply situation starting in 2012.

The most likely scenario resulting from combining likely scenarios based on the above three groups of factors is: prices of natural rubber will continue to remain quite high well into 2011; the effect of new planting during 2005-2008 will presumably result in somewhat lower prices starting from 2012 onwards, but it is most unlikely that prices will collapse.

The rubber prices are here to stay higher for some more time. All indications are that the price spiral may turn around after 2012, but will stabilize at reasonable levels that would ensure profitability to growers and also some relief to consumers.