By Jom Jacob:

As the global rubber industry value chain is taking the journey towards sustainable future, the biggest challenge is to equip the resource-poor smallholders, the weakest link, who are passing through hard times and help them to be on board. A chain is as strong as its weakest link.

Jom Jacob, Sr. Economist, Association of Natural Rubber Producing Countries(ANRPC)

World production of natural rubber (NR) increased 6.6%, year-over-year, to 10.309 million tonnes during the period Jan-Sept 2018. The production during full year 2018 is anticipated at 13.895 million tonnes, up 4.0% from the previous year . This 2018 figure could be slightly higher if the supply limiting programmes announced by Thailand, Indonesia and Malaysia are not implemented in full.
World consumption increased 6.6% to 10.650 million tonnes during Jan-Sept 2018 on year-over-year basis. Consumption during full year 2018 is anticipated at 14.212 million tonnes, up 6.7% from the previous year. Consumption in China, the country accounting for 40% of the world consumption, is expected to grow much faster during the Oct-Dec 2018 quarter. The auto-tyre manufactures have adopted a strategy to maximise exports to the US ahead of the abnormally high tariff to be imposed by the US very soon. Auto-tyre importers in the US also have adopted the same strategy.

Why NR prices stay bearish?

Although world consumption (14.212 million tonnes) is expected to exceed world production (13.895 million tonnes) during 2018, this is not getting translated into a favourable demand-supply fundamental. This is because production in some of the major producing countries has the potential to increase substantially in the event of favourable conditions such as attractive price and suitable weather .
For example, India has the potential to produce 71.9% more NR (than what is likely to be produced during 2018) if the prices and weather conditions are favourable. Similarly, Malaysia has the potential to produce 62.5% more quantity of NR under favourable conditions.
The ‘production potential’ is considerably up compared to the actual supply. Any improvement in price can unlock more supply into the market and thereby offset the price recovery. The market sentiment is caught under the grip of the ‘production potential factor’.
China sets the world trends in the demand for NR. During 2017, China consumed 5.386 million tonnes of NR by registering 7.5% growth. But, NR consumption in the country slowed down to 3.4%, year-over-year, during the period Jan-Sept 2018. Besides concerns over the trade war with the US, the Chinese auto-tyre sector has been hit by the sharp devaluation of Chinese yuan since mid-2018. The devalued currency makes imported raw materials more expensive to the auto-tyre manufacturers operating in the country.
NR market tracks the general trend in commodities and equities which are affected by the trade war concerns. Trade barriers and abnormally high tariff walls can damage all economic activities due to less affordability of tradable goods, disruption to global supply-chain, and the resultant lower productivity.
Sharp appreciation of the US dollar and the resultant outflow of speculative funds from Asian commodities have affected sentiment in the Asian commodities. The general trend in the Asian commodities is reflected on NR market as well.
The sharp devaluation of the currencies (against the US dollar) of the major NR-exporting countries has made NR exporters more price-competitive in the export market. This provides them extra space to quote lower price for NR (when quoted in US$) in the attempt to maximise the trade.
NR inventory held at the designated warehouses of the Shanghai Futures Exchange (SHFE) has progressively gone up. It touched an all-time high of 591,599 tonnes on the last Friday of October 2018. Investors at SHFE are sensitive even to small changes in the inventory. The abnormal building up of the inventory keeps sentiments down at the SHFE. All physical NR markets closely track the trends at Shanghai on a real-time basis.
Although crude oil prices sharply increased during 2018, it could not make any positive impact on NR prices. This dependence of NR market on crude oil is largely on account of speculation rather than actual substitution.
Speculative investors often (blindly) believe that higher crude oil price and the resultant higher price of synthetic rubber (SR) can cause large-scale substitution from SR to NR and thereby increase NR prices. But, the speculative players are now aware of the abnormally high NR inventory at designated warehouses of Shanghai Exchange. As such, they don’t perceive any shortage of NR even if substitution takes place from SR to NR.

Possibility of a trend-reversal

World production is anticipated to grow 5.8% to 14.696 million tonnes during 2019 if NR prices continue almost at the current level . World consumption of NR is anticipated at 14.730 million tonnes, up 3.6%. The consumption of NR in China during 2019 is likely to be affected by the high US tariff.
Although the anticipated supply and demand during 2018 closely match each other, the market sentiment will be largely driven by the ‘production potential’ factor. The potential production during 2019 (in the event of prices becoming attractive and weather conditions remaining favourable) is considerably up from what is anticipated (Table 6). For instance, Thailand can produce 13.9% more NR during 2019 than what is anticipated. Malaysia can produce 53.3% more and India can produce 64.7% more than what is anticipated for 2019.
The US dollar is likely to continue its appreciating trend unless the US goes for a policy decision to arrest/reverse the trend. A strengthening dollar usually keeps NR prices down.
Brent crude oil is anticipated to average at US$73.7 per barrel in 2019 (compared to US$ 72.8 expected in 2018 and US$ 54.2 realized in 2017). But, the high oil prices are unlikely to fuel NR market during 2019 due to the reason stated earlier.
In short, the demand-supply fundamental as well as other factors do not favour a recovery in NR prices during 2019.

Conditions beyond 2019

The ‘production potential factor’ is anticipated to stay unfavourable at least up to the year 2021 or 2022.
The tempo of new-planting and replanting has considerably fallen from 2013 onwards. During 2012, 676,000 ha was planted with rubber (refers to the total area new-planted and replanted with rubber in Thailand, Indonesia, Vietnam, China, Malaysia, India, Cambodia, the Philippines and Sri Lanka during the year). From that level, the figure has come down to 426,000 ha in 2013, 389,000 ha in 2014, 307,000 ha in 2015, 278,000 ha in 2016 and 197,000 ha in 2017.
Hevea rubber tree (also called Para rubber) takes about seven years for gestation. The planting rate reveals that a considerably fewer number of trees will be newly opened for tapping from 2022 onwards (because only 307,000 ha was planted seven years ago, i.e., in 2015). On the other side, existing trees would be removed during the year for replantation or crop-shifting. So, there is possibility of a shrinkage in mature area from 2022 onwards. This is expected to impact global production from 2022 onwards. But, one or two years more may take to absorb the excess stock accumulated until 2022. Thereafter, the ‘production potential’ factor is expected to turn favourable to the market after 2022. Or, a trend-reversal can be expected only after 2022.

Concerns of smallholders

We have had earlier phases of drastic fall in NR prices which persisted for several years. For instance, the period from 1995 to 2001. RSS 4 prices at Kottayam, India, fell from Rs. 50.59/kg in 1995 to Rs. 31.09 during 2001. But, during that period the average yield (measured in terms of the production per hectare of mature area) improved from 1,402 kg in 1995 to 1,570 kg in 2001, an increase of 168 kg per hectare. The gain in yield helped the farmer partly offset the income loss from the fall in price.
But, the current phase of price fall has a totally different story. When the price fell from RS. 216.68/kg in 2011 to Rs. 136.50/kg in 2017, the average yield came down. It came down from 1,733 kg/ha in 2011 to 1,311 kg/ha in 2017. A loss of 522 kg per hectare. In sharp contrast to the 1995-2011 phase, the decline in average yield during the current phase has aggravated the farmer’s loss in income from the price fall.
As the economic viability of rubber cultivation is under threat, the concern of a smallholder farmer is how to survive during the hard days. He may have to wait another 3 or 4 years for rubber prices to recover. History reveals that NR prices have stayed low for much longer periods than they remained high.
Therefore, a smallholder farmer cannot expect rubber cultivation becoming economically viable by anticipating prices to stay high
for long period. He will be forced to look for alternative livelihood if rubber cultivation remains economically unviable or less attractive for long.
Due to non-availability of alternative avenues, the exit may not be practical to all. Those who remain in rubber cultivation will be forced to reduce further investments in the sector. Such response by smallholders is reflected in the form of low rate of replanting, retention of uneconomic aged trees, abandonment of mature trees (untapped mature trees), poor adoption of scientific farm management practices, and technological stagnation.
This is also reflected in the average yield. The average yield (measured in terms of the annual production per hectare of mature area) came down in India from 1,903 kg in 2008 to 1,311 in 2017. Every decline in average yield increases the cost per kg of producing NR. Even if wages and all material input costs remain the same, the cost goes up just because of the drastic fall in average yield. The rising cost further aggravates economic viability of NR
production.
Another cost-pushing factor is the disadvantageous geographical location of rubber cultivation. In the case of a few major producing countries, NR is predominantly produced in the high-cost regions/provinces. In India, the per capita SDP of the Kerala State is 56% higher than the per capita of the whole nation. Similarly, the Songkhla Province, which is one of the richest provinces of Thailand, is the latex bowl of the country.
Every cent/kg of saving in cost is crucial in the journey towards economically sustainable NR production. Conventionally, a region’s suitability to cultivate rubber is ascertained largely on the basis of ‘Agro-climatic zoning’. In the point of view of economic sustainability, ‘socio-economic zoning’ may also receive an equally important attention.

Sustainability standards

To a smallholder, the emerging sustainability standards can only aggravate his already bad economic condition. He is forced to incur the cost of adopting the sustainability standards. The abnormal high cost of certification is not affordable to him. He is forced to meet the recurring cost of maintenance of the standards. Compelled by the additional economic burden to adopt the new standards, a greater number of smallholders may be forced to exit rubber cultivation.
A measure which is designed to make the rubber sector sustainable can intimately turn counter-productive.
A sustainable supply-chain of rubber industry invariably calls for equipping the smallholders to adopt the prescribed standards. Multiplicity of certification agencies and associated grey areas need to be addressed with the effective partnership of all segments of the rubber value-chain.
Partnership is essential to achieve:
• A tailor-made sustainability standard for smallholdings which is honoured by all segments of the value-chain
• A cost-free certification system which is acceptable to all in the value-chain
• Organization of effective awareness campaigns and capacity building programme among farmers, and
• Provision of strong support to farmers to enable them to adopt the prescribed standards.
It is impossible for the world rubber industry value chain to be sustainable without the sustainable development of the smallholder-dominated NR production sector. Smallholders are resource-poor and are passing through hard times. As the global rubber industry value chain is taking the journey towards sustainable future, the biggest challenge is to equip the smallholders and help them to be on board. A chain is as strong as its weakest link.