By A. Saj Mathews
Natural rubber (NR) market is badly craving for a turnaround. Though a few positive signs are around, the long wait for a significant recovery on the price front is still elusive. The fundamentals of demand-supply are not that encouraging for the short-term. Forecasts by rubber bodies and experts do not predict an immediate recovery in NR prices. As per all the indications of market and economy trends, things may somewhat change for the better only after 2020
It’s quite apparent that the natural rubber (NR) plantation industry is currently going through one of the most troublesome periods due to the prolonged steep fall in prices. As rubber cultivation has become uneconomic, farmers have suspended tapping, new planing and replanting activities. Demand from the vast Chinese market has declined due to the country’s sluggish economic performance. There is a growing awareness among all concerned that depending on NR as a mono crop is not desirable. There needs to be a paradigm shift towards multi-cropping, partially cultivating other remunerative crops side by side with NR, and going in for more value addition of farm fresh latex. This was the crux of the deliberations at the recently held 9th Annual Conference of the Association of Natural Rubber Producing Countries (ANRPC) in the Northeastern Indian city of Guwahati.
Based on figures covering the period up to October 2016, total supply of natural rubber from ANRPC member countries is expected to post a near-zero growth (0.4%) during 2016. This is the third continuous year that the supply presents low performance. Following 5.0% growth attained in 2013, supply fell 1.9% in 2014 and rose only marginally (0.8%) in 2015. But, consumption of natural rubber in ANRPC member-countries, accounting for 65% of the global demand, is expected to increase by 4.5% during 2016. In sum, global natural rubber industry is currently driven by favourable supply-demand fundamentals.
Short-term positive signals
There are some short-term positive signals in the NR market. The prices improved marginally during October 2016 as compared to September 2016 in key physical markets, according to the latest issue of Natural Rubber Trends and Statistics of ANRPC. Along with the favourable supply-demand fundamentals, a couple of non-fundamental factors helped NR market to gain momentum during October 2016, says ANRPC.
Up-trend in crude oil price from the end of October through mid-October and sharp devaluation of the Japanese yen from the end of September have sent positive sentiments to the natural rubber market. Looking ahead, supply-demand fundamentals are expected to stay favourable to price in the short-term. However, market sentiments are likely to be influenced by non-fundamental factors including developments in the crude oil market, trends in currency rates and response of speculative funds to possible outcome of the just concluded U.S. Presidential election.
It is to be noted that a clear picture of micro-realities is crucial to make realistic forecasts of global supply. According to Sheela Thomas, Secretary General of ANRPC, crucial questions relating to NR market forecasts are: What changes can be expected in mature area in the context of a volatile NR market? What are the policies of governments towards planting, maintenance and economic viability of rubber cultivation? What are implications of an uncertainty-laden market on average yield across countries? “These factors vary across countries,” she pointed out in her presentation at the Guwahati ANRPC Meet.
In Thailand, mature area expanded by 796,000 hectare during the period from 2011 to 2016 and the current policy of the Government does not encourage new-planting. In fact, the Thai Government targets to convert rubber area into other crops at the rate of 16,000 ha per year in next 7 years. On an average, 1.1 per cent (Over 31,000 ha) of mature area in Thailand is likely to be replanted with rubber every year from 2017 to 2023, according to ANRPC . About 1.5 per cent of mature area is expected to be discarded every year from 2017 to 2023. Mature area in Thailand is expected to increase by 326,000 ha during 2016-2023.
The case is no different in respect of Indonesia, the world’s second largest producer of rubber. Mature area in Indonesia expanded by 246,000 ha during 2011-16 and no assistance is given for new-planting or replanting. Alarmingly, a section of farmers has slowed down or stopped tapping in the backdrop of the prevailing low price. On an average, 1.5 per cent of mature area is anticipated to be replanted every year from 2017 to 2023. Mature area in Indonesia is anticipated to be discarded at the rate of 1.0 per cent every year. Only a marginal expansion of mature area is anticipated during 2017-2023 – from 3.038 million ha in 2016 to 3.045 million ha in 2023.
In the case of Vietnam, the country’s mature area expanded by 164,700 ha during 2011-16. According to ANRPC statistics, on an average, 3.4 per cent of mature area is anticipated to be annually replanted during 2017-2023 and the mature area anticipated to be discarded is at the average annual rate of 2.0 per cent. Mature area in Vietnam is anticipated to expand by 148,300 ha until 2023 — from 624,700 ha in 2016 to 773,000 ha in 2023.
China, Malaysia and India
Mature area in China expanded by 101,000 ha during 2011-2016. Anticipated average annual rate of replanting of mature area during 2017-2023 is 1.6 per cent. On average, 0.5 per cent of mature area is anticipated to be discarded every year from 2017-2023. In China, mature area is anticipated to expand by 184,000 ha by 2023 — from 720,000 ha in 2016 to 904,000 ha in 2023.
In sharp contrast to other major producing countries, mature area in Malaysia contracted by 245,500 ha during 2011-2016 — from 905,500 ha in 2011 to 760,000 ha in 2016. It is one country where farmers are highly sensitive to price and net income from rubber cultivation. Prevailing unattractive price has compelled a section of farmers to shift to other crops. A large extent of mature area is not tapped in Malaysia due low price and labour constraints.
Coming to India, large extent of mature area is left untapped from 2013 onwards due to unattractive price and high labour costs. Being a net importer with widening deficit, the Government policy is to increase domestic production. Unattractive price has affected the tempo of new-planting although replanting activity has improved marginally.
A small section of farmers has already discarded rubber trees. However, mature area expanded by 90,000 ha during 2011-2016, says ANRPC
It is estimated that during 2017-2023, mature area in India is anticipated to be replanted at the annual rate of 2.8 per cent. About 0.5 per cent of mature rubber area is expected to be discarded during 2017-2023. Mature area is anticipated to expand only by 89,000 ha. during 2016-2023.
No difference in the rest of ANRPC
In Cambodia, one of the upcoming NR producing countries, mature area expanded by 87,300 ha during 2011-16.
Here also, no assistance is given for new-planting or replanting. Interestingly, the Government has put a moratorium on Economic Land Concession (ELC), granted earlier, to attract investors to rubber cultivation. Due to the prevailing unattractive price, smallholders postpone opening trees which attain required girth for tapping. As in other ANRPC member-countries, in Cambodia also farmers tend to keep mature area untapped and a section of farmers has shifted to other crops like pepper and cashew.
In the case of Philippines, mature area expanded by 59,800 ha during 2011-2016. According to ANRPC figures, 1.2 per cent of mature area is expected to be annually replanted during 2017-2023 and 0.5 per cent of mature area is expected to be annually discarded during 2017-2023. The country’s mature area is expected to expand by 116,000 ha during 2017-2023.
In Sri Lanka, farmers having rubber as single crop are the worst affected by price fall, says Sheela Thomas in her presentation. For 61% smallholders in Sri Lanka, rubber cultivation forms main source of income and rubber is the main source of income for almost all farmers in the country’s non-traditional region.
In Sri Lanka also, low price has compelled a section of farmers to abstain from tapping and the low price has affected tempo of new-planting and replanting. New-planted area was only 770 ha in 2015 compared to 3,000 ha in 2011 while replanted was only 1,000 ha in 2015 compared to 3,000 ha in 2011. Moreover, unattractive price of rubber-wood discourage farmers from cutting aged trees for replanting, according to reports.
Factors affecting yield
In total mature area, share of low-yielding non-traditional regions is expected to increase sharply in a few of the main NR producing countries, according to experts. China, India, Thailand and Vietnam have considerably extended rubber cultivation to non-traditional regions during past 10 years. Changing geographical composition of mature area, having increasing dominance of non-traditional regions, is likely to lower the average yield for the above four countries.
Says Sheela Thomas: “Prevailing low NR price and its possible continuation for at least a couple of years more, can also exert downward pressure on average yield. Farmers may continue abstaining from maintenance and harvesting of trees. Lower application of inputs and poor maintenance can have an extended effect on average yield for at least couple of years in the future. Average number of tapping days per year may come down as more number of farmers reduce intensity of tapping. In India, farmers may remain reluctant to adopt “rain-guarded” tapping.”
Hit by lower prices and with no immediate turnaround in sight, there are many, especially the estate owners, who are sore that industry organisations like the Rubber Boards, ANRPC, IRRDB and IRCO are not attempting at a real cost study on NR production. They feel that unless and until such a cost study is made, there is no meaning in discussing sustainability of the NR industry.
In countries having severe labour shortage, farmers may have to minimise frequency of harvesting and proper maintenance of trees. In Cambodia, low rubber price prevents farmers from raising wages. Unattractive wages compel skilled tappers opting for more remunerative employment avenues. This is more severely felt in non-traditional regions.
In a few countries, upward social mobility of farmers and access to non-farm sources of income can dissuade a section of farmers from maximizing yield by adopting good agricultural practices.
What’s in store?
Forecasts suggest faster growth in supply during 2017, 2018 and 2019. Although these projections point out a gradual recovery of rubber prices after 2020, these forecasts are subject to downside and upside risk factors.
Three is the possibility of aggravation of prevailing low rubber prices, which can compel more number of farmers to abstain from proper farm management and harvesting. Besides affecting average yield, this can result in higher discarding rate. Possible rise in inflation and resultant increase in wages and other input costs can keep more farmers away from rubber cultivation. This can also result in higher rate of discarding.
Projections have assumed normal weather conditions. Unfavourable weather conditions and climate change can reduce supply. Possible crackdown on illegal rubber plantations in Thailand can bring down yielding area.
Thailand has reportedly planted 900,000 ha of rubber trees illegally in encroached forest lands and national parks.
Emerging economic trends and crude oil outlook suggest that the possibility of global NR demand growing beyond 4 per cent average rate is not positive during the period up to 2020. Realistic outlooks indicate that annual growth in demand may average around 3.3 per cent during the period up to 2020. “A slightly faster rate can be expected after 2020. Average annual growth may range between 2.5 per cent and 4 per cent,” says Sheela Thomas
Realistic Scenario suggests that the surplus may widen to 642,000 tonnes (i.e., 4.4 per cent of global supply) in 2019; but narrow down from 2020 onwards. Based on a Pessimistic Scenario, surplus may reach 1.050 million tonnes (6.8 per cent of supply) in 2021 before it narrows down from 2022. As per ANRPC’s estimation of Optimistic Scenario, supply will be in excess by 358,000 tonnes (i.e., 2.5 per cent of global supply) in 2019 and 187,000 tonnes in 2020. Supply will be short of demand from 2021 inwards.
The most important thing is that the price of natural rubber is not exclusively determined by demand and supply.
NR market is strongly influenced by general trend in commodity market, crude oil prices and exchange rate of currencies of major NR exporting countries. Due to more dominant influence of non-fundamental factors, NR prices need not always reflect imbalance between demand and supply
Global economy and NR market
Global macro economic conditions is a major driver of the demand-supply dynamics for the rubber industry. Extended Developed Markets (DM) recovery balanced by Emerging Markets (EM) growth, dollar appreciation and the China growth trajectory are the focal points in this context, says Dr Tirthankar Patnaik, Chief Strategist & Head of Research (India and Asia Finanial Division), Mizuho Bank
According to him, global growth will be increasingly driven by EMs, where market growth would continue to gain momentum while mature economies will be challenged to sustain their expansion levels. The US growth is likely to improve slowly as the drag from the oil sector and inventory correction have diminished, while the improving stability would benefit EM ex-China countries. “India would continue to grow at an impressive 7% + on the back of structural reforms, improved rainfall, lower interest rates, lower oil prices and robust public investment,” he added.
According to him, China and India together comprise 47% of the global NR market today, and would drive growth in the next decade. India can’t replace China just yet, which is showing signs of revival.