Rubber planters see no silver lining on horizon

By Chandeepa Wettasinghe
Sri Lanka’s rubber industry, which faced one of the toughest years, last year, due to lower global commodity prices, doesn’t appear to be recovering, with a few companies discontinuing their rubber production.
According to the Central Bank data, Sri Lanka’s raw rubber production in 2016 fell 10.72 percent year-on-year (YoY) to 79.1 million kilogrammes.
“(It’s) the lowest production volume reported in the past 50 years. This was mainly due to the reduction of the extent under tapping and the number of tapping days in response to the lower prices mainly in the smallholder sector,” Kegalle Plantations PLC Chairman Dr. Sena Yaddehige said in his annual review.
Some smallholders have also been cutting down rubber trees and selling them for timber and firewood in times of trouble. Since the commodity prices in the global market are linked to the global crude oil prices, the global crude price free fall in 2015 resulted in a major drop in the rubber prices.
Further, since synthetic rubber is produced from crude oil, the substitute has become cheaper, although some processed rubber products require a blend of both synthetic and natural rubber.
Although the commodity prices somewhat recovered in the recent months along with the crude oil prices, there is currently a glut in the natural rubber market.
Following the fall in rubber prices due to a supply glut in major producers in Southeast Asia, the Sri Lankan government for a majority of 2015 set a price ceiling, with the highest grade RSS 1 price set at Rs.350, although the effectiveness of this programme is debatable.
The differences in the prices were borne by the taxpayers, although the imports ranged as low as Rs.220 during the period.

The local RSS 1 prices in 2016 were around Rs.240. Elpitiya Plantations PLC Managing Director Dr. Rohan Fernando in his annual review to the shareholders said that the rubber prices are unlikely to show signs of recovery this year.
“This trend cannot be easily reversed as the global rubber prices don’t see any signs of resilience in the future,” he said.
Watawala Plantations PLC, considered one of the most profitable plantation sector companies, discontinued its rubber production during the past year due to segment losses. It started investing in oil palm over a decade ago and is currently the largest local producer.
Watawala’s foresight earned praise from the government recently and most of the other plantation companies are now increasingly investing in oil palm cultivation.
Oil palm, planted for the purpose of import substitution, generate returns in as low as three years after planting—compared to rubber with around five to seven years—and gave Watawala nearly Rs.400,000 in gross profits per hectare during the past year. Rubber gross profits per hectare are around Rs.25,000-50,000.
Last year also saw the Browns group divesting the rubber-heavy plantation companies Agalawatte Plantation PLC and Pussellawa Plantations Ltd to the furniture giant Damro, which may cut down the rubber trees for furniture production, followed by replantation.
Kegalle Plantations recommended protectionism to boost the rubber prices.
“If the Sri Lankan government brought restrictions on importation of natural rubber to the Board of Investment (BOI) industries, an improvement in prices locally could also be seen,” the company said.
The Central Bank data showed that rubber and plastic production capacity utilization in the country is relatively stable, indicating high imports compensating for low local production.
The low rubber prices resulted in the industrial rubber product exports growing 8.26 percent YoY to Rs.111.79 billion, while the agricultural rubber exports grew 34.10 percent YoY to Rs.4.58 billion.
Analysts opine that the import policies of China, which currently has a large rubber stock, would be the decider in the future global rubber prices, as the Asian giant’s middle-income segment booms and demands products that have rubber components.