In need of a bounce

In need of a bounce

Weak demand from China already has world rubber prices in the doldrums, and planned fire sale by Thailand won't help.

Rubber industry insiders are divided on why global prices for natural rubber have slid in recent months, but are confident that demand and prices will pick up, noting that the outlook for China’s car market looks bright.

Latex is collected from a tree on a plantation in Sungai Buloh outside Kuala Lumpur.

“The price of natural rubber … it’s volatile. It depends on the demand and supply,” said Niraj Thakkar, president of the All India Rubber Industries Association (AIRIA). “So when the demand is down and the supply is there, the price is going to be low.”

Rubber prices have been on a downward trend for months now and this month hit a 4½-year low amid plans by the Thai government to sell some of the stockpile it had accumulated in the course of populist buying programmes to prop up local prices.

Thailand has pledged to go ahead with its plan to sell 200,000 tonnes of rubber, shrugging off strong opposition from farmers.

The government spent 22 billion baht ($680 million) buying rubber from farmers from October 2012 to May 2013 without making much of an impression on prices.

The country this year is expected to produce 4 million tonnes of rubber, of which around 80% would be for export.

The caretaker government has finally conceded that something has to give before more new supply enters the market.

“The rubber stocks have been kept for such a long time and they have deteriorated,” caretaker Agriculture Minister Yukol Limlaemthong told Reuters last week.

“The longer we keep them, the bigger the losses will be. There’s no point in holding them further. We welcome all buyers. Exporters, trading houses and tyre makers can offer to buy from us.”

At current prices, the government might make as much as $390 million, 42% less than it paid, if it can sell all 200,000 tonnes.

But farmers say it’s the wrong time to release inventory, fearing the sale will add to the already severe downward pressure on prices, which have failed to react to the tight supply during the dry season in Southeast Asia.

Rubber futures in Tokyo last Thursday were the lowest since 2009 after the yen rallied and concern mounted that demand would ease in China. The contract for delivery in October on the Tokyo Commodity Exchange slumped 4.9% to 197.2 yen a kilogramme ($1,943 a tonne).

Rubber has retreated 28% this year as China is poised for the slowest economic growth since 1990.

While rubber farmers in Thailand have vowed to gather in Bangkok to protest against the government’s sale plan, some of their peers in Malaysia and Indonesia have stopped tapping, looking for other jobs.

The three countries account for the bulk of the world’s natural rubber production and earlier this year they called for a temporary halt to sales amid steep price falls. Thailand now appears to have broken that solidarity.

Demand for tyre-grade rubber is currently at the lowest point in five years, according to Mr Thakkar.

“It is concerning because people are losing interest in the production of natural rubber,” he said.

India is one market where there is demand for rubber as the country’s automotive industry has been seeing good growth. According to Rubber India magazine, produced by AIRIA, farmers in India blame the drop in prices on increased imports. India imported 91,135 tonnes more of rubber from April to December last year than in the same period a year earlier.

In response, the Indian government has imposed an inverted duty structure, increasing import duties by 50% since December 2013.

Mr Thakkar would like to see the inverted duty structure removed.

“It’s policies such as this one that are not allowing the industry to grow at the pace it should,” he said. “If they really want to assist the industry they should make it the other way around. Raw materials should be allowed to be imported at a lower duty than the product.”

In India, he said, manufacturers aren’t able to pay farmers the usual prices due to decreased demand from consumers. Producers should be patient and wait until the economy improves, he said.

“What is going to increase demand is genuine growth in economic factors,” he said. “As long as you’re not making losses, you should be happy.”

Around 90% of the world’s natural rubber supply comes from Southeast Asia, according to the Rubber Manufacturers Association.

In 2013, Thailand was the world’s top producer, followed by Indonesia, Vietnam and China, according to the Association of Natural Rubber Producing Countries. India ranked fifth and Malaysia sixth.

China is the world’s biggest rubber consumer and accounts for 33% of global demand. Some reports have pointed to the slow growth of China’s economy as an explanation for why demand has slowed.

The International Monetary Fund forecasts that China’s economy will grow by only 7.5% this year and 7.3% in 2015, compared 7.7% last year. The declining growth rate seems to worry outside analysts more than it does Beijing policymakers, who are trying to curb credit risk and trim excess factory capacity.

In China, tyres account for 70% of natural-rubber consumption, according to estimates from the Qingdao International Rubber Exchange Market. China is the world’s biggest automobile market.

However, just because the economy has weakened doesn’t mean people have stopped buying cars — and in turn tyres – say rubber industry insiders.

“Sometimes it depends on people’s consumption, how they are living still. More and more people want [to] buy their own car,” said Jason Ma, general manager with China United Rubber Corporation. “Sometimes it’s not connected with the [economy].”

The Chinese auto market is expected to stay strong for the second year running. The China Association of Automobile Manufacturers expects the market to grow by between 8% and 10% this year. After slow growth in 2011 and 2012, sales grew by nearly 14% in 2013.

Mr Ma also expects car sales to continue to increase. He attributes the slump in rubber prices to too much supply in Southeast Asia.

“Shoot back to eight to 10 years ago, the price of natural rubber was very, very high so the farmers, they wanted to make more, so they planted more rubber trees,” he said, adding that latex can be harvested from trees once they are around seven years old. “That’s why now … too much rubber.”

In Thailand, rubber industry leaders are looking to the future.

“Total export value by the year 2020 will be more than 1 trillion [baht],” said Boonharn Ou-Udomying, chairman of the Rubber Industry Club of the Federation of Thai Industries. The key to more revenue, he said, would be added value.

Mr Boonharn said the country aimed to cut exports of rubber raw materials from 86% of all shipments to 72%, and to increase the export of rubber products from 14% to 26% by 2020.

Thailand aims to retain its position as the world’s number one natural rubber producer, given a potential tappable area for rubber trees of around 2 million hectares, he said. “We still have about 30% to be tapped yet,” he said.
Mr Boonharn said the ongoing political unrest in Thailand had affected the domestic rubber industry, but not exports.

“Transport in the country is reduced. People do not change tyres, do not buy new tyres,” he said, adding that the protests had had only a “little bit” of a negative effect on the industry.

However, he also said Thailand may have competition from neighbouring emerging rubber-producing countries, Vietnam, Cambodia and Laos.

Mr Thakkar also said Africa was becoming a player in the natural rubber production industry.

“It will be interesting to see more countries competing. The consumer is only going to have the best quality product and availability,” he said.

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