Natural rubber industry outlook very volatile

Dr N Yogaratnam

According to IRSG's December 2011 edition of the World Rubber Industry Outlook, global consumption of natural rubber is expected to reach 11.5 million mt in 2012, up slightly from an estimated 11 million metric tonnes this year. "In the longer term, global rubber consumption is forecast to reach 36 million metric tonnes by 2020, with natural rubber consumption of 16.5 million metric tonnes," Global rubber consumption, consisting of both natural and synthetic rubber, is expected to touch 25.9 million mt in 2011 and rise to 27.2 million metric tonnes in 2012.

At the end of the third quarter of 2011, global rubber use hit 25.8 million metric tonnes, 6% higher year on year, the group said.

On the other hand, Toyo Tyre USA senior director sales John Hagan said with effect from January 1, 2012, they will increase prices of passenger, light truck tyres to a weighted average of 6 percent.

The continuous fluctuations in currency exchange, raw materials and oil prices make it necessary for them to re-evaluate their pricing policy and make adjustments, accordingly. This uncertainty trend appears to be the outlook for NR in the short and medium-term.

Regional market

The world's top three rubber producers- Thailand, Indonesia and Malaysia - aim to launch a regional market to set realistic prices and cushion farmers from volatility in future prices. After a ministerial meeting in Bali recently, they agreed to set up a regional centre for rubber, or a regional market that would help reflect realistic prices from producers.

The IRCo brings together rubber industry officials, exporters and government officials from the three Southeast Asian countries.

The idea appears to be still in a stage of feasibility study and the market could be a physical market, a futures market or a hybrid one.

The top three producers discussed volatile rubber prices at the ministerial level meeting of the International Tripartite Rubber Council (ITRC) in Bali, but the Council did not take further steps to stabilize prices saying that industry fundamentals remained strong, with no stocks overhang in the market.

The ministers appear to have noted that the recent downtrend of NR prices and that the decline was due to the weak sentiment brought by the ero zone debt crisis and global economic breakdown.

Benchmark Thai smoked rubber sheet (RSS3), offered at $ 3.35 per kg in December, has almost halved from a record high of $ 6.40 per kg in February.

The top three rubber producers, who account for around 70 percent of global rubber output, normaly use supply cuts and export curbs to help support prices, although some traders are skeptical about the effectiveness of the measures.

In December 2008, when physical rubber fell to a near seven - year low of $1.10 per kg as global recession loomed, Thailand, Indonesia and Malaysia agreed to cut exports by a total of 915,000 tonnes in 2009 to prop-up prices.

The market started to rebound from mid- 2009, but that was largely due to rising demand from tyre companies in China and India. The export restriction plan was never strictly enforced.

ANRPC

According to an ANRPC report released in the first week of December, deepening euro-zone crisis currently dominates NR trends. Commodities and stocks have fallen further during November as impacts from the deepening euro-zone debt crisis spread around the globe dimming hopes for any near-term solution.

Taking cue from the general commodity trends, prices of natural rubber (NR) have continued to fall, pushing down the growth in the commodity's global supply this year to 5.6% from an earlier-estimated 6.0% rate.

The latest demand-supply position with reference to ANRPC's member nations accounting 92% of the commodity's global supply and 57% of the demand, reveals a marked rise in the closing stock expected for fourth-quarter in comparison with the corresponding figures of first three quarters.

Supply to slow down

Preliminary estimates indicate that the price fall has started impacting on the supply.

The total supply from member countries of the ANRPC, which grew annually at 10.6% in Q1 and 10.7% in Q2, has slowed down to 2.5% in Q3, and is expected to slow down further to 0.6% in Q4. It is striking to note that the near-zero growth expected for Q4 is even in comparison with a period (i.e., Q4 in 2010) in which the supply had fallen 2.9%.

The revised outlook suggests that the total supply this year (January to December 2011) will grow only at 5.6% to 10.023 million tonnes, lower than the 6.0% rate previously-expected and the 6.6% attained in the previous year.

The following points summarize the various factors behind the slowdown in supply:

* The current phase of low rubber prices has reduced the enthusiasm among the dominant smallholders for continuing the good agricultural practices which are necessary for optimising the yield.

Due to a marked decline in the net profitability, growers largely tend to abstain from adopting stimulated harvesting or rain-guarded tapping. It also compels them to reduce the frequency of tapping with a view to minimizing the cost.

* Harvesting of low-yielding aged trees has become economically unviable tempting a section of smallholders, especially in Indonesia and Malaysia, to keep such trees idle. A section of growers are likely to opt for uprooting the aged trees for replanting.

* Concerns over supply-logistic disruptions, caused by unusually severe floods in Bangkok and some other parts of Thailand, have tempted the farmers in the country to reduce the tapping frequency.

During 2012, the supply is anticipated to rise 3.6% to 10.388 million tonnes as per forecasts available from member countries during the last week of November. This will be contributed by expansion in the yielding area by an estimated 162,000 ha and improvement in average yield by 19 kg per hectare.

Both Sri Lanka and Vietnam are very much in the race for the top spot in the list, with the leader India. However, these projected figures would be impacted by the effects of climate change and change in land use pattern. The erratic behaviour in climate has pushed the rubber grower community in the traditional areas into an era of uncertainty. There have also been incidences of pest attacks.

Yielding area is expected to expand during 2012 for Thailand (by 115,000 ha), China (21,000 ha), Vietnam (18,000 ha), India (15,000 ha), Cambodia (14,000 ha), Philippines (2,900 ha) and Sri Lanka (1,500 ha).

But yielding areas in Malaysia and Indonesia are likely to shrink marginally on account of expected uprooting of trees for replanting and possible abandonment of low-yielding aged trees, by the smallholders, in the backdrop of reduction in profit margin from the venture.

Cameroon rubber project

In the mean time, a unit of Singapore's GMG Global has struck a $410 million deal with Cameroon's government to develop 45,200 hectares of rubber and oil palm plantations.

The company Sud Cameroon Hevea S.A., 80% owned by GMG, is expected to become fully operational within four years, with production aimed at the export market.

Export to Fall

Total export of NR (including rubber compounds having more than 95% NR-content) from members of the ANRPC is expected to fall at a 3.0% annualised rate during the fourth-quarter (October-December 2011) on account of a weak demand and the floods in northern Bangkok which have disrupted supply-logistics.

The total export during this year is now anticipated at 7.571 million tonnes, up 1.3% from the previous year.

Anticipated figures available from member countries indicate a marginal recovery during 2012, with a 3.3%

Crude oil

Movements of NR prices (STR 20 Bangkok) vis-...-vis those of crude oil prices (Europe Brent) reveals that NR has generally moved in tandem with crude oil with a few exceptions.

While crude oil rose during the first seven days of November, driven by geo-political tensions in the Middle-East with Iran and Syria on the focus, NR failed to track the trend possibly due to a more dominating influence of a sluggish demand.

Short-Term outlook

There are a number of factors which can exert upward pressure on NR prices in the short-term:

i) The current phase of depression in rubber prices is likely to discourage the dominant smallholders from adopting short-term measures for maximising the output. This could be expected in the form of a lower frequency of tapping, lack of interest in rain-guarded tapping or in stimulation of trees. Farmers are likely to reduce application of inputs and other good agricultural practices which are essential for optimising the yield. These factors can push the supply growth further down.

ii) The price fall makes a large extent of low-yielding aged trees economically less viable or even unviable. This is expected to force farmers either to uproot such trees for replanting or to keep them idle.

iii) The period from mid-November onwards until the end of December is rainy season in southern Thailand which is the country's key rubber-growing belt. This is also the peak rainy season in Malaysia's east coast which is a region having significant importance to the country's NR supply. Possible disruptions to tapping due to rains are expected to impact on the supply from the two countries. Sri Lanka may also experience the same problem.

iv) India's Kerala State has reportedly received unseasonal depression rains during the last week of November. This is likely to affect the country's NR-supply during the month as the State accounts for nearly 90% of the country's supply and November is supposed to be a month of its peak supply. This factor has not been accounted in the country's supply expected for this month.

v) A rebound already seen in the Japanese economy and an expected boost to the U.S. economy prior to the presidential election can contribute to sentiments in commodity markets. With an expected further rebound in Japanese economy, the yen is likely to gain strength against the U.S. dollar unless intervened by the Bank of Japan. Possible further appreciation for the yen can depress the yen-denominated TOCOM rubber futures.

vi) Crude oil price is likely to register a seasonal rise due to speculations working on an expected higher winter demand and possible sanctions on oil exports from Iran and Syria.

vii) The current state of weak demand for NR has been partly due to a lower relative use of NR in the total demand for rubber (i.e., natural and synthetic rubber together). The relative NR-share is estimated to have fallen by 2.1 percentage point (from 43.4 to 41.3) during the period from 2009 to 2011. Based on the current level of the total global demand, a 2.1% fall in NR's relative share is equivalent to a reduction in NR's market size by 545,000 tonnes.

Among the various positive and negative factors, the most important one which is likely to dominate the short-term outlook for NR is the global economy. Given the depth of the euro-zone crisis and its increasingly worsening situation, possibility is remote for a marked reversal of the trend in NR-market in the short-term.

However, marginal ups can be expected in response to seasonal factors affecting the supply and possible developments in the oil sector.

It is important to note that the current depression in NR prices is not supply-driven. Even as the supply is expected to slow down further, NR market is likely to continue lacking momentum until the demand sector recovers and speculators come in to picture. Looking at this angle, developments in the euro-zone economy will be crucial to the market.

The climate changes that took place in major natural rubber growing countries of late have largely come to stay and this may further increase the "supply side instability of natural rubber, as both the South and Southeast Asia, which account for the major share of the world's production, are highly vulnerable to climate change and these changes have come to stay and would only aggravate the "supply instability". For this, it is imperative that researchers should focus on development of location-specific "smart clones".

Also, it is of paramount importance that the NR growing community maintains regular supply at fair prices so as to prevent the manufacturing community resorting to the extreme step of switching over to alternatives and substitutes in the long run.

Escape route, either by developing new technologies for reducing the NR content in their products or by switching over to alternative sources of NR, is certain to become the manufacturing industry's priority. Both these options can spell bad times for the NR growers.