Challenges and confusion in rubber business
Dr N Yogaratnam, Chairman, Tree Crops Agro
Consultants
It is said that civilization, as we know it today, is wholly
dependent upon rubber. It is an agent that follows us literally from the
cradle to the grave. This seems to be becoming all the more true,
considering its wide-ranging applications in the real world.
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Global NR consumption reached 10.4 million tonnes in the
year to September 2010 |
The Natural Rubber (NR) prices touching US $ 5 and expected to be
still higher in the near future, has caused a certain amount of
uncertainty in the industry at large. Prices of Thai RSS 3, Indonesian
SIR 20, Malaysian SMR 20 and Indian RSS 4 are already at record highs in
the region of US $ 4.60 to 4.93. Sri Lankan auction price for crepe
rubber is in the region of US $ 5.25 per kg. With the nearing of the
wintering season, prices are expected to be still higher due to short
fall in crop.
This is confounded by the adverse fallouts of climate change (a
complex problem), high cost of inputs like labour, shortage of tappers
and non-availability of cultivable land. NR production in Thailand may
fall by about 30,000 tons a year in the next six years or so because of
damage from floods, according to a Reuters report quoting an industry
source.
Further, high price of Natural Rubber (NR) is compelling
manufacturers to switch to synthetic rubber in many applications. Some
companies have completely replaced NR with SR in the production of items
like mouldings.
The use of Synthetic Rubber (SR) will increase due to price,
consistency and technological advancements that allow it to be used as a
substitute for NR.
Many companies are pursuing alternatives to both NR and SR. Good year
for example, has already produced concept tyres using a BioIsoprene
compound and expect to have sufficient quantities to support the
production of test tyres in mid-2011.
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The ongoing shift in geographical composition of rubber
areas within each country will also have an impact on supply |
It is however, felt that although the synthetic alternatives will
continue to be developed and occupy niche positions, NR still has a
balance of properties which the synthetics will find difficult to match
for a long time, if ever.
Environmental virtues of NR is another huge contribution which tends
to be ignored.
Also, the UN in its year-end forecast says that Asia’s economic
growth will slow in 2011 because of lacklustre growth in Europe and the
US and the governments around the world closing out stimulus programs
initiated during the global financial crisis.
Crude oil prices rallying to another new two- year peak of US $ 93.60
in the last week of December, 2010, and expected to turn higher towards
US $ 100 a barrel in early 2011, is another factor for consideration.
Can the global economy withstand such increases?
Global Consumption
The International Rubber Study Group (IRSG) in its latest report
(October- December, 2010) indicates that global demand of rubber nears
pre-recession level.
Over the twelve months to September 2010, global rubber consumption
reached a moving annual total (MAT) of 23.7 million tonnes, 15.2 percent
higher than at the same point in 2009.
The strong growth reflects the recovery in demand for vehicles and
tyres as well as manufacturer’s inventory rebuilding during the first
half of the year. The data suggest that global rubber consumption is now
virtually restored to its mid-2008 levels.
Regional consumption
Asia is by far the largest rubber consuming region, with demand of
around 14.8 million tonnes MAT at the end of the third quarter of 2010.
Compared to other regions, Asian rubber demand was less severely
impacted by the 2008/09 global recession, and over the first nine months
of 2010 demand growth in the region averaged 12.6 percent on a YOY
basis.
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Increasing proportion of aged trees is a major factor that
can affect the future global supply of NR |
Consumption growth in Europe and the Americas soared to around 20
percent YOY by the end of the third quarter; however, in some regions
actual demand is yet to fully recover to the levels seen in early- to
mid-2008.
China’s consumption estimates considered the larger NR stock build-up
in 2009, followed by a drawdown of these stocks in 2010.
By the end of the third quarter, Chinese demand reached 7.9 million
tonnes MAT, at which point YOY consumption growth was 10.6 percent.
In Japan, consumption growth has been accelerating steadily during
2010, reaching 14.1 percent YOY by the end of the third quarter; demand
at 1.7 million tonnes MAT is still some way off the pre-2009 level,
however.
Supply and Demand
NR market remains in deficit. The latest production and consumption
data suggest that the NR market deficit was -169,000 tonnes in the year
to September 2010 (Table 1 ). The latest data also point to a wider
surplus than previously estimated in 2009 (425,000 tonnes vs. 237,000
tonnes in the last quarterly report) due mainly to the adjustments made
to Chinese NR demand and inventory carryover.
(a) Moving Annual Total to September 2010
Global NR stocks are estimated to have remained at around 1.6 million
tonnes on an annual moving average (AMA) basis over the third quarter of
2010.
Synthetic Rubber (SR) recovers
Following the late-2008/early-2009 downturn, SR production and
consumption both staged a strong recovery in the twelve months to
September 2010, growing at a YOY rate of 16.5 percent, production from
12170 (000 tonnes) to 13595 and consumption from 11802 to 13297, with SR
balance remaining at 298. Synthetic alternatives will continue to
develop and occupy niche positions.
Outlook
The world rubber economy depends heavily on the world economy. The
economic outlook of the IMF’s semi-annual World Economic Outlook,
released in October 2010 indicates that the world economic growth rate
forecast for 2010 is estimated at 4.8 percent, while the 2011 projection
has been estimated at 4.2 percent. Asia’s economic growth in 2010 is
projected at 6.2 percent, which is expected to move downwards to 4.8
percent in 2011.
The tyre sector
Total world tyre production is forecast to increase by 13.1 percent
in 2010, with 2011 output expected to expand by a further 6.7 percent
(Table 2).
NR consumption
Global NR consumption is forecast to rise by 15 percent to 10.7
million tonnes in 2010; in 2011, NR demand is expected to rise by a
further 4.6 percent to 11.2 million tonnes (Table 3).
SR Consumption
Global SR consumption is forecast to rise by 15.6 percent to 13.6
million tonnes in 2010; in 2011, SR demand is expected to rise by a
further 7.6 percent to 14.7 million tonnes.
Production of NR
Global NR production is forecast to rise by 5.3 percent to 10.2
million tonnes in 2010; this figure accounts for the first nine months
of available trade and production data (Table 4).
In 2011, partly due to the impact of higher prices, and assuming
normal growing conditions, global NR output is expected to expand by a
further 7.4 percent to 11.0 million tonnes.
NR supply and demand balance
With NR production forecast to expand by 7.4 percent in 2011,
compared to consumption growth of 4.6 percent, the sizeable deficit of
-446,000 tonnes implied by the 2010 forecasts is expected to narrow to
-180,000 tonnes in 2011 (Table 5).
To summarize, over the twelve months to September 2010, global rubber
consumption reached 23.7 million tonnes, 15.2 percent higher than at the
same point in 2009. Global demand is now virtually restored to its
mid-2008 level.
Global NR consumption reached 10.4 million tonnes in the year to
September 2010, with YOY consumption growth accelerating to 13.5 percent
compared to 7.1 percent in June; at the same point, global SR
consumption was 13.3 million tonnes, registering consumption growth of
16.5 percent, compared to 14.8 percent three months earlier.
Global rubber production reached 23.9 million tonnes in the year to
September 2010, 13.6 percent higher than at the same point in 2009; NR
output was 10.3 million tonnes, with YOY production growth running at
9.9 percent, while SR supply reached 13.6 million tonnes, a 16.5 percent
increase.
The NR market deficit was -169,000 tonnes in the year to September
2010, at which point global NR stocks were estimated at around 1.6
million tonnes.
With higher production, global NR exports reached 6.97 million tonnes
in the year to September 2010, a YOY increase of 14.4 percent; global SR
exports continued to increase, reaching 7.84 million tonnes.
NR physical market prices made further gains in the three months to
November 2010, tracking the future market on firm support from strong
fundamentals of tight supply and steady demand.
Related issues
Increasing proportion of aged trees is a major factor that can affect
the future global supply of NR. Age is the most important single factor
determining the yield for a given clone. Agro-climatic setting also
plays a major role. It may be noted that yield profile significantly
varies across clones and that the growers increasingly adopt a mixture
of clones. This is expected have an impact on output.
The ongoing shift in geographical composition of rubber areas within
each country will also have an impact on supply. There is now increasing
prominence for non- traditional regions and agro-climatically less
suitable areas for growing rubber. There are other issues too, such as
lower yield, longer immature (unproductive) period and marginalization
of holding size.
The climate- yield relationship is a complex one. There is yet no
definite answer to the question as to whether the influence of climate
change on NR supply is negative or positive.
Sri Lanka’s output
Systematic replanting of aged trees with high yielding clones is
likely to improve Sri Lanka’s output significantly in the coming years.
About 66 percent of the planting undertaken during 2003 to 2010 had
been with high yielding RRISL clones made available to the industry over
the last 15 to 20 years.
The expected output from year 2010 in areas planted since 2003 in Sri
Lanka and all ANRPC countries taken together are given in Table 6.
Average yield in Sri Lanka, is poised to improve considerably. A part
of the new supply arising from the planting undertaken during 2003 -
2010 will be offset by the uprooting of the existing trees for
replanting.
However, although in relation to global supply, the new supply may be
insignificant, yet, increase in domestic supply would certainly help the
local rubber products manufacturing sub-sector. Production in the
non-traditional areas is unlikely to have a significant effect on
supply.
The challenge to the Sri Lankan rubber industry is, therefore, to
transform the developing favourable features of the rubber industry to a
sustainable long term growth through creation of a perfect business
environment and culture to address the deficiencies in the plantation
systems through human and technological up-gradation, land and crop
development strategies etc. for the rubber industry to contribute its
share as a partner to attain macro-economic stability in the country.
The ANRPC says that the global NR supply may remain somewhat tight in
the coming decade despite the increase in re-plantings and new plantings
in major NR producing countries.
This is mainly because of the lower yield expected from the new
plantations in the non-traditional areas and massive uprooting of aged
trees that are likely to take place in the next few years.
On the other hand, the demand for NR is bound to go up with the
phenomenal growth of the tyre and automobile industries. The IRSG has
predicted that NR share of the global elastomer consumption will
increase from 42 percent in year 2010 to slightly above 46 percent in
year 2020.
The negative side however indicates that unpredictability of climate
and the consequent fall in latex yield, shortage of skilled manpower,
rising labour cost and non availability of suitable land for extending
rubber cultivation have raised concerns as to whether the production of
NR will catch up with the projected demand.
Notwithstanding the many challenges facing natural rubber, experts do
not yet foresee a significant drop in NR use in the coming years.
Various countries are adopting different strategies to meet the
challenges facing NR.
A question that arises now is will the current high prices of NR
trigger a surge in new planting and replanting of rubber? It has been
pointed out that the rise in NR prices during the 2005-2008 periods had
led to a dramatic increase in new planting by 11 Asian countries, with
more than one million hectares added during this period.
The current high prices will definitely be a stimulus for further new
planting, but presumably not at the scale seen during 2005-2008 in view
of limited availability of land (and labour) for such massive new
planting now.
In any case, if the forecasts of IMF, IRSG, ANRPC and other relevant
sources are realistic, NR prices would be expected to be sustained at a
reasonably attractive level, say US $ 2.5 to 3.0, for few more years.
However, if NR supply is negatively affected by weather and climate
change it may go beyond US $ 5.00 at least in the next two years.
The challenges and threats in NR business will therefore continue in
the coming decade and possibly beyond.
Achieving a balance in producer - consumer profitability will be a
difficult task. Consumers are still struggling to pass on the rise in
the raw material cost to end users.
Table 1
World NR supply and demand balance (‘000 tonnes)
2008 2009 %change 2010 % change
(a)
NR Production 10128 9702 -4.2 10277 9.9
NR Consumption 10203 9277 -9.1 10446 13.5
NR Balance -75 425 -169
Table 2:
World production of tyres by vehicle type (‘000 units)
2009 2010 2011
Passenger Cars 954230 1079432 1151836
LC Vehicles 223545 256695 280332
M/H C Vehicles 142482 165797 185434
Total 1320256 1501924 1617601
% change -8.3% 13.8% 7.7%
Table 3
Natural rubber consumption,
(‘000 tonnes)
2009 2010 2011
North America 790 1047 1046
Europe 1000 1341 1377
Asia 6871 7460 7912
Middle East 66 57 61
Africa 100 114 116
Latin America 482 615 600
Oceania 19 12 15
WORLD 9277 10664 11151
% change - 9.1% 15.0 % 4.6 %
Table 4:
Production of natural rubber (‘000 tonnes)
2009 2010 2011
Thailand 3164 3245 3467
Indonesia 2440 2703 2940
Malaysia 856 970 1099
India 821 853 893
China 644 651 678
Vietnam 724 770 780
Cote d’ Ivoire 206 220 238
Sri Lanka 137 143 149
Brazil 127 133 143
Asia 9056 9632 10345
Africa 425 449 471
Latin America 251 264 281
World 9702 10219 10970
% change - 4.29 % 5.3 % 7.4%
Table 5
Natural rubber supply/demand balance, world (‘000 tonnes)
2010 2011 % change
NR Production 10219 10970 7.4%
NR Consumption 10664 11151 4.6%
NR Balance -446 - 180
Table 6:
Expected output from area planted, 2003-2010
Country New Re- Cumulative
Planting Planting output
(‘000 tonnes) (‘000 tonnes) (‘000 tonnes)
Sri Lanka 15 29 57
ANRPC Countries 2002 953 4546
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