Last Updated : 2019-01-22 16:20:44

Apps Advertising Home Delivery Feedback

How sustainable are current natural rubber prices?

24 December 2014 03:57 am - 0     - {{hitsCtrl.values.hits}}

A A A

 

When one looks at the impact of low natural rubber (NR) prices on profitability, two aspects emerge. On the one hand, it appears to be a simple topic but on the other, immensely complex, covering global geo-politics- the rural poor in the developing world and huge tyre consumers.

 

 

It is well known that NR is a traded commodity, like oil or gold. The price of NR is defined by the balance of buyers and sellers in a number of markets around the world, principally in Tokyo (TOCOM), Singapore (SICOM) and Shanghai (SHFE).It is now of general opinion that most of these markets are broken due to lack of liquidity and volume. But since a better model cannot be offered for pricing NR, let us use this to look at the ‘sustainability’ of the current prices.

 


FACTORS INFLUENCING NR PRICES
The fundamental factors influencing NR prices are demand and supply, while all other factors have indirect effects through changes in the fundamentals of demand and supply. For example, an improvement in the world economy leads to an increase in rubber demand, a decline in the price of NR relative to SR influences a falling share of SR in total rubber consumption and a weak currency relative to currencies in other producing countries encourages an increase in exports and output from that country and hence, a rise in world NR supply.Changes to the stock situation provide an indication of the relative tightness of the rubber market. Tightness in the rubber market provides upward pressure on prices and vice versa.

 


Important factors in the long term include technological innovation, economic development, etc. In the medium term, i.e. two to three years ahead, rubber prices depend mainly on the cyclical movement of t he world economy. Then t here are fluctuations along this gentle phase of the rubber cycle, influenced by various short-term factors such as weather, currency movements, futures market activities, market interventions and irregular demand.When forecasts of output are discussed particularly for NR, they are produced, assuming that no extraordinary events occur in producing countries.Furthermore, the forecasts are based on production and export controls in producing countries such as replanting, chopping trees, switching to other crops or tapping suspension. However, they have not materialised to a large degree.

 


REALITY OF RUBBER PRODUCTION COSTS
Most of the world uses the SICOM sixmonth price on TSR-20 as its reference price. That’s just a particular grade of NR. TSR stands for Technically-Specified Rubber and the 20 is a measure of the impurities in the rubber – higher numbers mean more impurities. The six-month price means what you can expect to pay for delivery six months hence (in April 2015). The precise grade is not important but the price on the SICOM exchange at the close of business on October 31 was US $ 1.60/kg. That’s significantly below the cost of production (COP). In fact, the COP is not an easy number to quote in a general article of this nature.

 


At a seminar organised by the International Rubber Research and Development Board (IRRDB), in Malaysia, recently this subject of COP was discussed. It was understood that the cost varies depending on the local cost of land, labour, fertiliser and many other factors.When we calculate t he cost of NR production, we usually refer to the cost to the grower (farm gate); we tend to exclude many other factors that should actually go into COP. Therefore, the data normally reported as COP and the figures used in this article are underestimates of t he true costs. One of the decisions from a recent IRRDB seminar was to set up a much-needed programme to evaluate the real COP in different parts of the world.

 


Kerala in Southern India is the most prosperous region in the world where they still grow rubber. Costs there are around US $ 2.50/kg. In China, the authorities recently gave data on production costs. In Hainan – a relatively wealthy province – it is US $ 2.34/ kg. In the less-wealthy Yunnan Province, that falls to US $ 2.08.As we look to less prosperous areas in Southeast Asia, such as Cambodia, Laos and more remote parts of the two largest rubber producers in the world: Indonesia and Thailand, the figure falls to about US $ 1.80. But that is still more than the world price of US $ 1.60.

 


The Sri Lankan situation also appears to be about the same. The average COP in regional plantation companies (RPCs) is Rs.270 to Rs.310 (US $ 2.23) and NSA is around Rs.280 (US $ 2.15). Some are able to still make some profit but not all. A similar comparison is possible in smallholdings also. RSS prices are lower and COP values are also comparatively lower.

 


TRADERS AND SPECULATORS DOMINATE
The impact is very severe. They say, sales of motorcycles have halved; the same with consumer products; bad debts are increasing across the rubber growing regions; families can no longer afford to pay for education and many more.Free-market economists would argue that this is a simple case of supply and demand. When there is oversupply, prices fall. In the world of synthetic rubber (SR) there are periods of oversupply and one or more of the main supplies choose to close factories and re-balance the equation. That’s all true and simple.

 


SR is purely an industrial raw material. The producing and consuming industries are in general closely related and dominated by large and global enterprises. Being a petroleum-derived product and manufactured by polymerisation process in chemical plants, the management of supply against demand is relatively straightforward. To a certain extent, the prices of its basic ingredients, namely the monomers, are more or less influenced by the price of petroleum.
The difference with NR is that there is a six to seven-year period between planting trees and beginning of production. Therefore, capacity needs to be predicted on a seven to 10-year cycle, which is difficult, at best. The second difference is that cutting production in NR means a smallholder or farmer deliberately cutting off his source of income for an extended period. That’s what is happening, now.

 


NR is consumed as an industrial raw material. In rubber articles, the two kinds of elastomers (NR and SR) are never distinguished by us as users. It could be natural, synthetic or blends of various rubbers in different proportions. The manufacturers of these articles are basically choosing the kinds of rubbers to be used on the grounds of technological merit and economic availability. Seventy percent of NR and 60 percent of SR have been manufactured into automotive tyres.

 


However, NR is unique in the sense that it is consumed as an industrial raw material but produced as an agricultural commodity and now over 80 percent being sourced from independent smallholders. Consequently, it becomes a social commodity where more than 30 million small farmers are at stake worldwide. The global economic slowdown has obviously affected NR demand greatly, resulting in lowest ever market prices in t he past several years. Reduced demand was exacerbated by i ncreased supply from Southeast Asia, most remarkably from Vietnam, which in the last six years had doubled its production.

 


MECHANISM
Years 2001 and 2009 were turbulent years for NR prices, with declines in all markets. In an attempt to bring prices to a more remunerative level, three major producing countries - Thailand, Indonesia and Malaysia - covering over 70 percent of world production, had agreed in 2001 to set up an International Tripartite Rubber Organisation (ITRO) to manage sales and withhold stocks.

 


The three countries agreed to cut exports by 10 percent as of January 1, 2002 in addition to cutting output by 4 percent in 2002 and 2003 through replanting, diversification with other crops and reduced new planting. This joint action by the major producers has suggested that NR producers consider current prolonged low prices as no more sustainable.Previously, INRO, which was a collaborative effort involving producers and consumers, was considered not effective by the majority of its producer members and was consequently dissolved in October 1999.

 


TYRES AS EXAMPLE
Most NR goes into truck tyres. A typical truck tyre consumes around 20kg of NR. If we say the average COP of NR is US $ 2.10 (probably an underestimate), then those 20kg of rubber represent a payment from the developing world to tyre makers of US $ 10 for each tyre. Multiply that by 150m truck tyres made each year and the deficit is US $ 1500 million or more.If governments subsidise their rubber tappers – who are also voters – this means the tax-payers of Indonesia, Thailand, Vietnam and other developing countries are subsidising tyre makers around the world to the tune of billions of dollars each year.

 


NO EASY WAY OUT
There are no easy solutions to this. We cannot fight the markets; we cannot — in the short term — develop new pricing mechanisms; we cannot introduce subsidies or other market distortions. These have been tried in many commodities in many different guises. The only ones to win from such measures are the traders and speculators who dominate the international markets.

 


It has been suggested that probably the most worthwhile is for tyre makers to repay that debt by funding schools, healthcare projects and other social welfare schemes. Tyre makers do this but not on the scale that is needed or justified by the current low price of NR. These corporate social responsibility (CSR) projects fund a few millions of US dollars but not billions every year that are needed and justified by the economic arguments.
And then what happens when the prices rise again — as they did in 2010 and 2011 — well above US $ 4. Above around US $ 3 the growers are rewarded for their efforts. But of the tyre makers were to pull the plug on those CSR projects, it would be a disaster.

 


FUTURE DIALOGUE
As mentioned at the beginning of this article, it is far from simple. It is believed, the key to this is education, transparency and dialogue. Many tyre engineers have no idea of the impact that the low price of NR has on families in Southeast Asia; meanwhile a few in the NR-producing communities have much idea about the realities of tyre production.

 

 

Consumers such as the ETRMA and producers such as ANRPC need to talk but there should be increased dialogue between tyre technical departments and the Rubber Research Institutes to see how the NR community can respond to the needs of the tyre industry for new materials for truck tyres and other products where the properties of NR remain among the best in the world.

  Comments - 0


Add comment

Comments will be edited (grammar, spelling and slang) and authorized at the discretion of Daily Mirror online. The website also has the right not to publish selected comments.

Reply To:

Name - Reply Comment


Wahhabism and radicalization of local Muslims Fix it For Good

Intelligence-driven kinetic means can only do so much. The acid test would be

Rs.190 Million worth of Priorities ?

‘A supplementary budget of 190 million rupees for two bulletproof vehicles

Refugees become refugees again in Sri Lanka

There was a collective anguish over helplessness and isolation inside the gar

Anti – Terrorist Action Must Not Become a Witch Hunt Against Sri Lankan Muslims

Mohammed Zahran the founder-leader of the National Thawheed Jama’at and sus

MIRROR CRICKET