Uncertainty prevails in global natural rubber supply

Global rubber business had been showing signs of steady recovery,
although the demand and supply equation has still not stabilized.
However, NR prices remain attractive with SMR 20 at Kuala Lumpur
fetching US$ 470.15, RSS 4 in Kottayam at US$ 468.00, Latex(60%) in
Malaysia at US$ 444.07, per 100 kg on August 02, and SMR 20 at 467.90,
RSS 4 in Kottayan at 468.70 and Latex(60%) in Malaysia at 442.57 on
August 03.
Lanka crepe, LCX1 remained at Rs 628/= per kg on August 02, 2011 and
Rs 632/= per kg on August 04. Yet it becomes useful to look at the
progress of the very volatile global NR industry at regular intervals.
The weekly price movements from July 23, to July 30, are given in table
1.
ANRPC
The latest ANRPC report on the performance of global NR industry
indicates that supply of NR continues moving along a slow track with no
end in sight for the trend to change. As concerns over the U.S. and
European sovereign-debt issues have been keeping investors in suspense,
commodities and stocks dropped while gold made unprecedented gains to
touch historic peaks. Lingering worries about the global economic growth
have pushed the safe-haven Japanese yen to near-record highs. Despite
the yen’s sharp appreciation and an unfavourable short-term demand
prospects for NR, rubber prices registered a slow recovery beginning
from the end of June, helped by continuing tightness in supply, and
strengthening of Thai baht, Indonesian rupiah and Malaysian ringgit.
Figure 1: Demand- Supply- Stocks of NR, January- September, 2011
Demand- Supply
Figure 1, indicates the updated trends in demand and supply, and the
trends anticipated up to September with reference to ANRPC member
countries currently accounting for 92% of the global supply of the
commodity. Total supply is likely to grow on year by 3.4% in the third
quarter (July to September) as against 10.5% and 3.3 % rates attained
during the first two quarters respectively. Supply had recorded a 12.1%
growth during the previous year’s third-quarter.
Short term outlook
Short-term outlook on natural rubber market has been weakened by
significant uncertainty and risks from the U.S. debt negotiations and
continued concerns about the euro-bloc’s debt crisis. To be more
specific, few factors are likely to exert downward pressure on NR prices
in the short-term.
US factor

The U.S. real GDP growth has slowed down to 1.5% in the second quarter
of this year. The unemployment rate, measured in terms of “new claims
for jobless benefit” rose further in July.
The U.S. Congress remains deadlocked over a plan to raise the debt
ceiling and to deal with the country’s huge deficit. Failure to
compromise and raise the debt ceiling can cause a severe shock to the
world economy. NR market, with its heavy dependence on transport
industry, is highly sensitive to economic trends.
Stock markets have already fallen in response lingering worries about
the global economic outlook. Commodity markets cannot be expected to
continue enjoying support from hedge funds as far as uncertainties over
global economic outlook are eased. Hedge funds and other investors are
already in a defensive mood in view of possible downward moves by
markets.
Japanese
Uncertainty over the U.S. debt ceiling negotiations and European
sovereign debt problems has already taken the Japanese yen to near
record levels because investors consider yen, along with Swiss francs
and gold, as safe-haven. The safe-haven Japanese yen is likely to gain
further strength unless intervened by the Bank of Japan. Yen’s
strengthening normally depresses NR prices due to its direct influence
on TOCOM RSS futures.
China
China’s manufacturing activity, measured in terms of PMI (Purchasing
Managers Index), has reportedly declined in July. The country’s
second-quarter GDP slowed down to 9.5% annualized rate from 9.7% rate
attained during the first quarter. The country’s import of NR (including
rubber compounds having more than 95% NR-content) is anticipated to
fall 5.4% during the third quarter on a yearly basis.
Malaysia
Consumption and import of NR in Malaysia are likely to fall during the
third quarter by 10.1% and 6.3% respective annualized rates due to
increasing consumer preference to nitrile gloves over more expensive
NR-based glove.
Global supply
Total global supply of NR is relatively better every year during the
five months from August to December as compared with the first seven
months (from January to July) due to seasonal factors. About 50% of the
global supply every year is produced during the last five months
although the pattern significantly varies across countries. This means
that the period from August to December is normally considered as a
season of improved availability of NR as compared the previous seven
months.
NR Prices
At the same time, the factors expected to influence NR prices to remain
high should also be considered. A section of macroeconomists are of
the view that debt crises in the U.S. and Europe are solvable and hence
the global economic recovery could pick up momentum. Although China’s
GDP slowed down during the second quarter to 9.5% from the first
quarter’s 9.7% rate, the difference is marginal. Moreover, the country’s
growth during the second quarter was above the rate widely expected.
This has eased immediate concerns about a possible slump in China’s
economic growth.
Japan’s major automobile manufacturers have made good progress in
restoring their operations to pre-quake levels. Toyota Motor Corporation
reported a big step forward in restoring its parts-supply chain and
thereby helping to bring output in June closer to year-earlier levels.
Nissan Motor Co. and Honda Motor Co. also reported steps forward in
recovering their domestic production after the earthquake on March 11.
Total supply of NR has slowed down to an annualized 3.3% during
second-quarter and the trend is likely to be extended to the third
quarter. Based on latest estimates and forecasts available from Member
governments, the total supply during this year is likely to grow only
4.9% as against 6.6% attained in the previous year.
Continued strengthening of the Japanese yen will inevitably prompt the
Bank of Japan to intervene because a strong yen can weigh on Japanese
exports and a pose threat to the country’s fragile economy. The yen’s
correction can contribute to the NR physical market through TOCOM RSS
futures.
Crude oil price stays high despite a weak global economic outlook.
Indications from the oil industry support the view that a correction in
oil price is unlikely in the short-term even if global economic recovery
keeps its slow pace.
Possibility of a higher inflation arising from pro-growth policy of the
newly-elected government of Thailand is widely expected to prompt the
Bank of Thailand to raise interest rates further. There has already been
a rate hike effective from July 13. A higher interest rate,
supplemented by clearing of political uncertainty, could help in
attracting foreign investments into the country and thereby making the
Thai baht further stronger. This can also help other currencies in the
region to gain strength. The NR market normally gains from
strengthening of currencies of NR exporting countries.
Although the above positive and negative factors which could influence
NR prices in the short-term, yet, market indications support the view
that the slow growth in supply and high oil price could help the NR
market to continue staying strong.
Long-term outlook
ANRPC has updated its forecasts on NR supply for the period up to 2018,
by incorporating latest revisions of data on planting, separately
available from each country and is of the opinion that it is too early
to project NR supply beyond 2018 because the supply from 2019 onwards
depends also on the area to be new-planted from 2012 onwards. As farmers
are yet to decide on the planting to be undertaken from 2012, the
forecasts could be unrealistic.
Yielding rubber area in a year is usually computed by accounting the
area to be newly opened for tapping and the expected extent of aged
trees uprooted during the year. There are limitations in estimating the
area to be uprooted during each year from 2012 through 2018. This is
because farmers individually take decision on replanting and their
decision is influenced by a host of factors which include (i) age
structure of existing trees, (ii) current price and short-term expected
price of rubber, (iii) price of rubber wood, (iv) income sources until
replanted trees attain maturity, (v) prevailing cost of planting
materials and labour, (vi) incentives available for replanting, (vii)
availability of desired planting materials, and (viii) choice of
alternative crops.
During the period from 2005 to 2010, the uprooting rate varied from
1.5% to 2.5% of the previous year’s yielding area. Compared to these
rates, the uprooting rate from 2012 is expected to be higher for two
reasons: (i) The rate remained low during 2005-10 because farmers
largely retained aged trees for taking advantage of abnormally high
prices. (ii) A large extent of existing yielding trees was planted
during 1980s which was a boom period of planting. The trees planting
during that period inevitably have to be uprooted during 2012-18.
On the other extreme, an uprooting rate beyond 5% seems unlikely.
Therefore, the yielding area for the years from 2012 to 2018 are
projected against four different replanting rates, namely 2%, 3%, 4% and
5%. Among the four replanting rates, the most likely rates are 3% and
4%.
A high rate of uprooting implies that a larger extent of existing
yielding area would be entering into gestation phase spanning for about
seven years. The resultant reduction in yielding area will be pushing
the supply down. On the other hand, a low uprooting rate can minimize
the reduction in yielding areas and thus can contribute to supply.
There are constraints for average yield to improve further, with the
notable exception of Philippines and Cambodia. The major constraints
are: (i) A marked increase in relative share of low-yielding
non-traditional regions in the case of yielding area in Thailand, India
and Vietnam. Non-traditional regions are agro-climatically less suitable
for growing rubber and moreover farmers in those regions are generally
new to rubber cultivation and hence unskilled, (ii) A relatively higher
influence of ‘tender yielding trees’. Yield from rubber tree remains
low during the first 3-4 years since it is first opened for tapping,
(iii) Even if rubber price takes abnormally high levels, there is only
limited space available for improving yield from existing yielding
trees. This is because farmers have already exploited all available
options as price stayed abnormally high in the last couple of years.
There are limits for enhancing the yielding in the short-term. Moreover,
there have been reports that yield potential of trees in some of the
regions has been damaged due to unscientific over-exploitation of trees
in the backdrop of high prices and (iv) Existing clones are not
susceptible to climate change.
The countries included in the projection in table 1, currently account
for 92% of the total global supply of NR and they have cultivated rubber
trees in a total extent of 3.167 million ha (including the area
replanted) during the period from 2004 to 2011. Although cultivation has
also taken place in regions outside the ANRPC, the expansion rate has
been reportedly much lower compared to the high rate of expansion in
ANRPC member nations; especially in Thailand, China, Vietnam,
Philippines and Cambodia. Therefore the total global supply, including
small producing countries outside the ANRPC, could grow at rates which
would be lower than those given in table 1.
The likely scenario, as given in the table, indicates that the supply
growth would be marginal during 2012 (Between 2.8 % and 3.8%). Although
the growth is anticipated to accelerate slowly from 2013 onwards, it
could reach only up to around 6% by 2015. The years from 2016 are
expected to witness marked slowdowns in global supply of NR. These
figures clearly indicate that the present tightness in NR supply would
be continued and the commodity would be in deficit through 2018 even if
the demand grows only at moderate rates (Reference, ANRPC Report, July,
2011).


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