Global rubber market to remain volatile

N. Yogaratnam (PhD, London - Consultant, National Institute of Plantation Management)

Recent estima- tes of the International Rubber Study Group (IRSG) indicates that the total rubber consumption in the first seven months of 2007 has increased to 22.07 million tonnes, the growth rate being from 2% to about 4% on year-on-year growth basis during the 7-month period.

Asia/Pacific continued to lead in growth with increase in the region of 8.3%. The sharp growth in Asia/ Pacific comes not only from China but also from Malaysia, Thailand and Indonesia.

The relatively rapid growth in NR as compared to SR consumption has increasingly become evident in recent months. Global NR consumption is estimated to have reached 9.62 million, a growth rate of 5.3%, while SR reached 12.45 million tonnes with a growth rate of 3%.

NR production

Sharp recovery in the growth rates in the top producing country, Thailand, combined with already high growth in other major NR producing countries have contributed to the recent rise in global NR output except in Malaysia where the rate fell from 15.8% at the beginning of the year to 2.2% estimated in July.

The year end NR production is forecasted to be around 1,267 tonnes as against a production of 1,284 tonnes in 2006.

Thailand is expected to lead with a production of 3,255 million tonnes closely followed by Indonesia with 2,707 million tonnes and India 865 million tones. Sri Lanka's total production is forecasted to be around 112 million tonnes at an average 3% increase over 2006.

Thailand has identified about 2,408 million hectare (ha) classified as suitable areas to grow NR and about 4,729 million ha as marginal areas. The suitable areas according to their classification are those that could be tapped within seven years and with a production of more than about 1560 kg/ha/ yr.

Although Sri Lanka has programmed to grow rubber on 40,000 ha in Hambantota, Moneragala and Badulla divisions, areas available and suitable to grow NR in accordance with Thailand's classification would be much higher than 40,000 ha.

Another NR producing country, Cambodia, has about 500,000 ha of land with soil condition ideal for rubber growing and 70,000 ha devoted to rubber cultivation. The Cambodian Government estimates that by 2015, the replanting area in total can be upto 150,000 ha and production expected to increase by 150,000 tonnes.

With higher growth rates of supply over demand, the deficit in the NR sector has still continued but at a declining rate reaching from 452,000 tonnes to 328,000 tonnes in the first seven months.

Supply/demand

For SR, growth rates of supply continue to be greater than demand leaving the surplus increasing further.

In any case, it is the relative stocks to the level of consumption which is an important factor influencing rubber prices. For NR, despite the recent upturn, the stock/consumption ratio is still very low and hence exerting pressure on NR price to remain high.

For SR, it is the high cost of production which is influenced by high oil prices which is currently on an increasing trend, a major determining factor in addition to the stock/consumption levels.

As oil prices have been rising and almost reaching the peak level of around U$ 79 per bbl in New York and SR feed stock have been tight in most major market, it is not surprising that SR prices have remained at recent high. However, it has been reported that SR prices have continued to be lower than its NR counterpart in both the USA and Europe; New York TSR 20 price was almost 30% above the price of SBR 1502.

NR prices have been somewhat disappointing since the end of May, removing recently all the gains made over the first five months of 2007.

The CIF value had been around U$ 2.16/kg and the FOB around U$ 1.98/kg. The market sources attribute the upward performance during five months to May as a reflection of the disruptive supply condition brought on by, on the main, adverse weather condition in the main rubber producing region of Southeast Asia.

Thus, the relatively sudden and sharp reversal in the price trend from the end of May could be taken as being an indication that the market is convinced that there will be smooth supply of NR with sufficient quantity coming to the market, at least for the near future.

The sudden and sharp price drop, also indicates that there may have been more than just unfavourable supply condition behind it. It appears to suggest a large presence of speculative element, according to IRSG. Moreover, no substantial changes have also been noted at the global level for demand.

NR forecasts

Global rubber consumption is forecast to increase from 21.41 million tones in 2006 to 24.20 million tonnes by 2009 at an annual growth rate of 4.2% per year.

NR consumption is forecast to rise from 9.22 to 10.66 million tonnes or 4.7% as compared to an increase of 3.7% a year from 12.18 to 13.61 million tones for SR. Global NR output is forecast to show a rise from 9.68 to 10.72 million tones at an annual grow rate of 3.5%.

Global NR demand/supply equation forecasts a sharper growth rates of consumption to production which are expected to bring the surplus further down but global stocks according to IRSG, are to continue to rise during the next three years.

NR market volatility

NR has been a commodity traded in open markets. As such, it is always subjected to influence by factors both fundamental and speculative which is clearly evident from the strange volatility in prices for the last several months.

Weather pattern being seasonal and predictable to a certain extent, although the timing and the duration will vary from country to country, is therefore less likely than speculation in creating violent fluctuations in rubber prices.

This would continue to hit the rubber goods producers and the general consumers quite hard.

Another factor of concern is that the high prices induce an enhanced tempo of fresh planting in countries like Thailand, Cambodia, Vietnam, China etc. This may eventually lead to over-supply and a decline in NR prices on a long-term basis but less volatile market

Domestic scenario

Rubber prices at the Colombo Auctions are expected to remain around Rs. 225 to 250/kg although Sri Lanka being known to account for less than 2% of global production and supply, will not have the ability to influence world prices.

Nevertheless the sustainability of the rubber industry can be assured by adopting a two-pronged strategy, involving short term and medium/long term.

The short term aspects would include enhanced production efficiency in terms of human resources in an effort to increase productivity and contain cost of production.

These can be achieved by enhanced management productivity, harvesting productivity and processing productivity.

In improving worker productivity, a combination of effective management, better skills and improved knowledge, positive attitudes etc will go a long way to upgrade an average worker into a top performer.

Medium/long-term strategies centre around land productivity in terms of output per unit of land with increased replanting and development of degraded and marginal land etc.

These will inevitably lead to the concentration of output and its market share, exploitation of economies of scale, reducing fixed costs and containing overall cost of production.

Continuous efforts at value addition which has shown a significant growth since 1991, should be made thereby transferring rubber from a " Commodity" to an industrial product.

The plantation model of rubber cultivation in the modern context should be that it helps to transform traditional agriculture into a truly agri-business encompassing high - tech farming, capital intensive technology, strong commitment to technological changes, value addition etc.