Rubber, rubber everywhere: With oversupply, Malaysia among countries hit by falling prices

A worker collects raw latex from a rubber tree at a plantation in Pahang January 12, 2016. — AFP pic
A worker collects raw latex from a rubber tree at a plantation in Pahang January 12, 2016. — AFP pic

KUALA LUMPUR, March 22 — Malaysia, as the fifth largest producer of natural rubber globally, will be among the countries impacted by the falling prices of the commodity for at least another 10 years, despite a 16 per cent price rally this year.

A Bloomberg report said that with prices still more than 70 per cent down from their peak in 2011, key players are predicting at least one more challenging year, with the most bearish predicting lower prices to last another decade.

The blame is being placed on overproduction, with Thailand, Indonesia and Vietnam’s crops, which were planted in 2011 following the price boom, maturing and pushing global production up to a record high, resulting in a poor balance of supply versus demand.

“While futures have gained this year, helped by news Asia’s major producers will curb exports, the rally has started to stall on concerns over how effective the cut will be,” said the report.

“The only way you can sustainably support prices is by leaving the rubber in the trees. Curbing exports by producers is a very short-term solution and its effectiveness is unclear,” the report added, quoting veteran rubber trader Michael Coleman, who is also director of the RCMA Group which has an approximately US$1.3 billion (RM5.2 billion) a year soft-commodities turnover.

Coleman’s gloomy outlook echoes those of industry associations including UK-based Tyre Industry Research chief executive David Shaw.

The 30-year veteran said that global rubber output is likely to continue to be higher than tyre demand until around 2027-28 and producing countries will be stuck for almost a decade in a period of very low prices.

“As low prices discourage planting, the price may spike on a shortage in about a decade.

“If producers were to look at projected demand in 10 years’ time and arrange planting in order to roughly balance demand, they could ensure much more stable pricing,” Shaw said, adding that governments should have been controlling planting more carefully to balance supply and demand into the future.

It takes about seven years for rubber trees to reach maturity once a plantation is started, and then produce for a further 20 to 25 years.

International Rubber Study Group secretary general Salvatore Pinizzotto said that farmers may be forced to keep producing at the current low prices due to the huge investments during the price boom, contributing to the glut.

To help stabilise prices, Thailand, Indonesia and Malaysia, which supplies about 70 per cent of the world’s rubber, have agreed to cut exports by a combined 240,000 tons over four months starting on respective dates from April.

“While Thailand, the biggest producer, agreed to cut exports, it may have a harder time cutting production. With elections due on March 24, political parties have been seeking to win farmers’ votes with guaranteed crop prices, inexpensive loans and cheap health care, aiding an expansion in rubber output,” said the report.

Farmers make up more than half of Thailand’s electorate.

In Malaysia, the government said it will continue its rubberised road project, and has approved a RM100 million allocation for the maintenance and construction of roads using cup-lump modified bitumen in ports and industrial areas.

Economic Affairs Minister Datuk Seri Mohamed Azmin Ali recent announced a total of 552,543 rubber smallholders in the country are to benefit from RM338 million allocation through the Rubber Industry Smallholders Development Authority (Risda).

Risda said the money will cover programmes such as the replanting of rubber trees, basic agricultural infrastructure, additional economic activities and entrepreneurship, an incentive scheme to boost rubber productivity, as well as expansion of services and training of smallholders.

Thailand produces about a third of the world’s rubber, followed by Indonesia at 27.3 per cent and Malaysia at 8.8 per cent. Malaysia is also the largest exporter of latex and medical gloves.

Coleman said that the problem was not that demand for rubber was weak, but rather oversupply was the problem.

“Lower prices are the market’s way of dispelling higher cost producers.

“The job of the markets is to shut down the higher cost marginal production and in essence that’s what the market’s been trying to do. It’s been trying to find what price hurts 10 per cent of the producers,” he said.

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