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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Price Declines and Industry Challenges Crimp Lanka’s Rubber

Price Declines and Industry Challenges Crimp Lanka’s Rubber

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Sstar

Sstar
Vice President - Equity Analytics
Vice President - Equity Analytics
April 22, 2014 (LBT) - Despite rubber being one of our key productive assets there is growing concern of the continual price declines experienced since 2012. Although enjoying a boom for nearly a decade, Sri Lanka’s rubber prices have seen considerable declines in recent times.

According to Colombo Rubber Traders’ Association (CRTA) Chairman, M. S. Rahim, the price drop in the world reflected on Sri Lanka too. “With lower prices in the current period, costs of production will increase and we’ll be faced with losses. Smallholders too have to bear the price drop and drop in production due to bad weather conditions that prevailed in 2013.”

Commenting on the prices declines he added, “In 2010 prices (Thick latex crepe) reached a high of Rs. 593. In 2011 prices reached record highs of over Rs.600 for a period of 7 months. After a slow start in 2012, prices recovered thereafter began to drop slowly to end the year at Rs.385 per kilo.”

“In 2013 the market recovered quickly at the beginning of the year to reach over Rs.400 in the first quarter after which there was a slight drop in the second half, but overall prices were stable at Rs.400 till the end of the year. From January 2014 there has been a sudden sharp drop in latex crepe prices to a current Rs.305,” Rahim stated.

The recent Weekly (1st April 2014) Rubber Auction recorded average prices for Latex Crepe between Rs.300-230 and RSS remained unquoted. Deputy Chairman, Planters’ Association of Ceylon (PA) and CRTA Vice Chairman S. S. Poholiyadde said, “Over the last three years, the rubber price has fallen by over 50%. It is now around Rs.300, where it was Rs.600 in 2011.”

Price declines

Explaining the reasons for this declines Poholiyadde said, “This is mainly due to the global economic situation. Especially in European countries, there has been an economic slowdown. This has had an impact on the prices globally.”

Adding to the gloom in rubber’s bear market is the supply glut as stockpiles in China swell. “There has been stockpiling in China. Most of the largest manufacturing facilities are in India and China, and this too has pushed their market up compared to us,” Poholiyadde noted.

Commenting on the easing demand from the world’s largest consumer of the commodity, Damitha Perera, Director Rubber, Forbes and Walkers Commodity Brokers stated, “The price is stagnant now. The reason is stockpiles in China with 300,000 tonnes. They are not aggressive in the market, and it's not good for us.”

“Crepe and RSS is stagnant as this is the lean period and off season. A boom in prices is not expected for a few months.” Perera added.

Production challenges

The cost of production remains a key challenge affecting the performance of the country’s rubber industry. Compared to earlier years the cost of production (COP) continues to escalate and is expected to increase further.

“China, the largest consumer in the past four years, found its economy slowing down and, due the fact that they were over stocked, prices had to slow down. Besides countries such as Vietnam and all other producing countries had reached high levels of production,” Rahim noted.

The Plantation Workers’ Collective Agreement of April 2013 has exacerbated this. “There has been an increase in the cost of production by about Rs.20-25 as a result of the wage increase, said Poholiyadde.

Meanwhile, Professor Asoka Nugawela, Professor of Plantation Management at Wayamba University noted that wages would obviously increase further. “We need to adopt strategies to lower cost of production,” he said.

Smallholder and RPC impact

A vital sector of the rubber industry is the smallholder who grows 60% of the rubber produced in the country. “When production comes down, it is the smallholders who are mainly affected,” says Poholiyadde. Because of low yields, smallholders will be compelled to sell their produce at depressed prices.

Smallholders, who receive insufficient revenue because of low yields and low prices, could be forced to convert land to other crops. The CRTA Report 2012/2013 states: “It is critical that these smallholder growers obtain the best possible prices for their rubber, in line with prices realized at the auction, to enable them to remain viable.”

Declining prices also affect the larger Regional Plantation Companies (RPCs). Not only are smallholders feeling the pinch, but the large RPCs are affected too. According to Professor Nugawela, “A drop in the farm gate price of more than Rs.100/kg will have a significant negative bearing on producers in both sectors.”

Environmental and land issues

For competitiveness and viability of the industry, key issues such as environmental and agriculture issues need to be addressed. Experiencing extreme weather patterns also contribute towards a decline in production.

“The limited land area we have for rubber and land acquisitions are causes for concern,” says Poholiyadde, adding that “in addition to tapper shortages, especially with the younger generation not wanting to get into this line of employment.”

With these difficulties affecting the industry, Professor Nugawela requests a vision for the foreseeable future, “We have to manage with a vision to achieve a substantial growth in productivity and performance to challenge the inevitable increases in Cost Of Production.”

Future Survival

With production and price declines affecting the industry, public sector support becomes imperative. According to Poholiyadde a protectionist strategy is crucial. “I would say it's very vital, because over 60% of this industry production is by smallholders. So many people are dependent on rubber for survival.”

Commenting on the way forward, Poholiyadde says, “We should ensure that value-addition factories continue to work uninterrupted. A lot of people have their hopes in the rubber industry.”

Sri Lanka’s rubber industry needs to attract foreign investment in order to expand and diversify. “We should promote more such industries to come in and set up manufacturing facilities here. I believe that is the way forward,” he added.

FLOWER2

FLOWER2
Manager - Equity Analytics
Manager - Equity Analytics
Rubber and palm oil markets are dull. In some point recovery will be there. On the other hand Tea and coconut oil is going to have good time.

http://www.tea.keells.lk/marketreport.htm


TEA MARKET REPORT : SALE NO: 15 - 22ND / 23RD APRIL 2014

COMMENTS
\The Auction commenced after a break of one week due to the traditional Sinhala & Tamil New Year Holidays.

In the first three months of 2014, prices at the Colombo Auction is holding up and increasing over the same period last year. The National average of Rs.486.65 is the highest on record for a first quarter of any given year and exceeding over the previous best of Rs.428.70 recorded last year. World tea prices are expected to remain moderately high in 2014 due to the rise in tea consumption and a sluggish world tea production. All major producing countries including Sri Lanka, Kenya and India have recorded shortfalls during the first quarter.

Despite the volume of 1.13 Mkgs of Ex-Estate teas on offer and considering the quality which was to a certain degree lower, the prices were fairly stable. A few good Western invoices where the product quality was reasonable differentiated from the rest, sold in excess of Rs.500/- supported by special inquiry and airmail bids. The bulk of the teas sold between Rs.410/ - to Rs.440/- on average. There was limited demand for Pekoes, BOPs & FBOP grades. Nuwara Eliya’s however continued to maintain its edge over most of the Westerns with good prices being registered for BOPs and BOPFs. However, a quantity of liquoring leafy grades remained unsold for want of bids.

The 3.2 Mkgs of Low Growns that came under the hammer this week, met with improved demand. In the leafy category, OP1,OP and OPAs met with a stronger market, however the Pekoe started firm at the commencement but declined marginally as the sale progressed. BOP1s too were slightly weaker. In the small leaf category, tippy varieties led the way with sharp price increases. FBOPF1s maintained last levels, whilst the FBOPs continued its weaker trend.

With the strong market, we expect the Low Grown elevation average to reach the
Rs.490/- levels.

There was excellent demand from Iran and Russia whilst, Syria, Turkey , Saudi Arabia, Dubai, Iraq and Libyan buyer’s also lent useful support.

http://www.dailymirror.lk/business/economy/46132-palm-oil-imports-rise-as-coconut-oil-output-drops-.html


Palm oil imports rise as coconut oil output drops
TUESDAY, 22 APRIL 2014 09:27

A sharp decline in Sri Lanka’s coconut oil production in 2013 has resulted in significantly more palm oil imports, which is a close substitute for coconut oil, the 2013 Central Bank annual report showed.

Coconut oil production declined around 45 percent year-on-year (YoY) to 45,208 metric tons (equivalent of 349 million nuts) in 2013, amid palm oil imports increased 41 percent YoY to 89,959 metric tons.

In 2012, palm oil imports (both palm kernel oil and crude oil) declined significantly to 63,723 metric tons from 135,340 metric tons in 2011.

Interestingly, the increase in palm oil imports took place despite a hike in special commodity levy (SCL) on refined palm oil to Rs.115 per kilogramme in early 2013.

The SCL, which was introduced for edible oil imports from May 2012, was increased further in November 2012 to encourage local coconut oil production.

Meanwhile, Sri Lanka’s coconut production declined 14.5 percent to 2.5 billion nuts in 2013 with coconut exports falling 2 percent YoY to Rs.205 million. Coconut production hit 2.94 billion in 2012, its highest since the year 2001.

According to the Central Bank annual report, the decline in coconut production was mainly due to the lagged effect of lower rainfall in major coconut growing areas in 2012.

Since around 72 percent of coconut production was demanded by nonindustrial users, the decline in coconut output mainly affected industrial users during the year.

As a result, desiccated coconut production declined sharply by 30 percent to 29,200 metric tons (equivalent of 228 million nuts) in 2013.

The shortage of coconut supply together with the increase in farm gate coconut price pushed up the cost of production of the desiccated coconut industry, leading to a major decline in desiccated coconut exports during the year.

The desiccated coconut exports in 2013 declined by 30 percent to 28,202 metric tons compared to 2012. However, a growth in coconut milk powder, cream and milk production was recorded in 2013.

Coconut prices however increased steadily in 2013 due to lower coconut production and increased competition among the coconut kernel-based product manufacturers.

The average auction price of coconut increased to Rs.32.64 per nut in 2013 from 22.95 per nut in 2012 and the average retail price of coconut also increased to Rs.43.16 per nut in 2013 from Rs.34.56 per nut in 2012.

The average price of coconut oil increased to Rs.258 per litre in 2013 from Rs.224 per litre in 2012, largely due to the considerable increase in copra prices. The average desiccated coconut price at the Colombo coconut auction also increased to Rs.239.05 per kilogramme from Rs.173.19 per kilogramme during 2012.

Despite the increase in desiccated coconut prices, the average export price declined in 2013 to US $ 1.55 per kilogramme from US $ 1.65 per kilogramme during 2012, reflecting a contraction in profit margins during 2013

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