World rubber market faces supply, price squeeze

Kochi, India (Reuters): The global rubber market could see two years of tighter supplies and rising prices as output sputters while producers replace ageing trees and demand drives higher in a worldwide recovery, conference delegates said.

“Fundamentals are favourable for higher prices. I can’t say how much prices will go up. But look at growth in India and China, you will get the answer,” Paul Sumade Lee, Director of Sri Trang Agro-Industry Plc STA.BK, the world’s No. 1 natural rubber producer and exporter, said.

Car industry-driven

Demand in China and India, the world’s top consumers of natural rubber, is driven by the car industry. Strong economic growth in both Asian powerhouses is boosting incomes and consequently auto sales are clocking growth rates of 20-30 per cent.

China’s imports are expected to hit a record this year.

“Prices will continue to trade higher. Stockpiles with tyre makers are very thin and supplies are falling due to the weather,” Lee said on the sidelines of a conference.

Global natural rubber demand could rise to 10.3 million tonnes in 2010 from 9.4 million tonnes a year ago, according to the Singapore-based International Rubber Study Group (IRSG).

“The market is going to be very tight for three to four years and demand is rising, but natural rubber production will not rise at the same speed because of older plantations,” Stephen Evans, Secretary-General of IRSG, said.

Key Tokyo rubber futures extended gains on Wednesday to a fresh five-month high, with the contract for March delivery touching 322.6 yen per kilogramme.

Rains and replanting

On the supply side, forecasts are being trimmed because of heavy rains in major rubber producing countries and to take account of lower yields as the high prices make farmers reluctant to replace older trees with new ones which need time to bear fruit.

This year, estimates of global natural rubber output are being trimmed from an original 9.47 million tonnes — 6 percent above last year, Djoko Said Damardjati, Secretary-General of the Association of Natural Rubber Producing Countries (ANRPC), said.

Next year, natural rubber output is likely to be steady to lower than this year, according to ANRPC, which represents 92 percent of the world’s total production.

“In 2010 and 2011 production would be under pressure due to weather and old plantation,” Damardjati said.

Jom Jacob, senior economist at ANRPC, said farmers could uproot old trees in 2011, keeping output steady that year on 2010 or slightly lower.

The ANRPC comprises Thailand and Indonesia, the world’s top two producers, along with Cambodia, China, India, Malaysia, Papua New Guinea, Philippines, Singapore, Sri Lanka and Vietnam.

Thailand and Indonesia alone are likely to produce 9 percent and 7.7 percent lower respectively than previous estimates because of heavy rains, Lee of Sri Trang said.

“Unseasonal weather patterns were very strong this year... rainfall was very high in Thailand and Indonesia,” he said.

Oil palm

In addition, farmers in Malaysia are replacing rubber plantations with oil palm because of lucrative prices for the commodity and a labour shortage in the country, Damardjati said.

Demand for synthetic rubber is likely to rise to 13.6 million tonnes in 2010 from 11.8 million tonnes — but here; too, the supply side could be crimped.

Availability of a key ingredient, butadiene, is likely to reduce as oil companies increasingly switch to more profitable products in the refining mix.

“Butadiene is a by-product... oil companies are not interested in its production,” said Stephen Evans, secretary-general of IRSG. “With new techniques they are starting reducing its production.”