Slow growth in advanced economies hits rubber prices

By Gamini Warushamana

The rubber boom that producers enjoyed during the past three years has come to an end and the market now experiences a continuous price decline.

Chairman of the Colombo Rubber Traders Association, M.S. Rahim said the price decline was mainly due to stockpiling in China and slow growth in advanced and emerging economies.

According to average auction prices in February 2014, rubber prices have dropped below average prices in February 2010.

Dr. Anura Dissanayake of the Rubber Research Institute (RRI) said that low demand and oversupply has caused the price drop.

Harvest from huge replanted fresh rubber lands in Thailand and Indonesia is coming into the market.

The closing down of a large glove manufacturing factory following the water contamination issue in Weliweriya is another reason for the drop in local prices as the factory used over 45 percent of the latex collected by the company. Now production in the factory has stopped. He said that according to forecasts this sluggish market will continue till 2017.

Rahim said that even though the price has dropped the growers get a profit. The cost of production of rubber is around Rs.125-135 per kg and, therefore, it is still profitable.

He said that the issue our rubber sector faces is not the price fluctuation but the sustainability of the sector with continuously declining cultivated land extent, not having a re-planting plan and low quality products. The bulk of our products are RSS 4 or RSS 5 low grade rubber that fetch low prices, he said.

Dr. Dissanayake said that supply management to face the crisis cannot be implemented due to the nature of the trade.

The world's top natural rubber producers attempted strategies of this type but it failed.

Indonesia, Thailand and Malaysia account for over 70 percent of global natural rubber output and they tried curbing exports, reducing tapping or buying the commodity from farmers in a co-ordinated fashion to reverse the price decline.

China is the top consumer of natural rubber and it is mainly used in tyre production. Natural rubber makes up more than 40 percent of the cost of a tyre and tyre manufacturers are the biggest gainers by the slump in rubber prices.

Representatives from the three South-East nations will meet this month to hammer out a deal. A preliminary meeting of officials will be held this weekend in Singapore.

An agreement may provide a boost to rubber producing firms such as Thailand's Sri Trang Agro-Industry but could raise input costs for tyre makers such as Bridgestone Corp, which is one of the biggest users of rubber.

“I think only producing countries can support prices at this stage,” said an analyst at Yutaka Shoji Co in Tokyo, Gu Jiong. “Whatever they hope to do, they just need to show their commitment. The mood in the market is bad.”

The three South-East Asian nations, which are grouped under the International Rubber Consortium (IRCo), last acted jointly in 2012-2013, agreeing to cut exports by 300,000 tonnes, or three percent of 2012 global output.

But rubber prices rose only temporarily before sliding again due to fears that the debt crisis in Europe could derail demand. Indonesia, the world's number two producer, then publicly called for the pact to be discontinued, saying it was not the best solution under the circumstances.

IRCo sees prices as “unreasonably” low and advises trade associations to encourage members not to sell at prevailing rates, the group said in a statement on its website today.

IRCo will also propose to “accelerate and enhance the implementation of the Supply Management Scheme,” it said.

The group will approach Vietnam to seek its support, Chief Executive Officer, Yium Tavarolit said by phone from Bangkok.

The country produced 949,600 tons of rubber last year, making it the third-largest grower, according to data from the Association of Natural Rubber Producing Countries.

Thailand, the biggest producer, had sought to bolster prices by unilaterally extending export restrictions for 60 days after it failed to agree with Indonesia and Malaysia on maintaining their curbs at a meeting in April.

Thai exports surged 15 percent to 3.44 million tons last year, government data showed.

ANRPC data showed that shipments from Indonesia, the second-largest, rose 7.4 percent to 2.72 million tons.

“The drought is expected to be severe this year, curbing latex tapping,” said Yium, referring to wintering, which started in late February.

“The season may last longer than the usual two and a half months,” he said. The Rubber Association of Indonesia has called on members to restrict sales as prices are low and stockpiles are limited, Daud Husni Bastari, who heads the group, said.

Global surplus may be 241,000 tons this year, a fourth year of glut, while reserves may surge 19 percent to 2.35 million tons, the highest in the past 10 years, the International Rubber Study Group said. China, the world's second-largest economy, will expand 7.5 percent this year from 7.7 percent in 2013, the International Monetary Fund estimates.

Stockpiles monitored by the Shanghai Futures Exchange total 207,658 tons, the highest since October 2004, bourse data showed. Data from the Association of Natural Rubber Producing Countries showed that imports by China will probably grow 11 percent this year to 4.26 million tons, compared with a growth of 14 percent a year earlier.

“We want to see prices at fair levels for producers and users,” Yium said, without giving an estimate. “We want it to be stable with low volatility.”