Rubber supply deficit likely in 2022

THE world’s natural rubber supply is likely to face a deficit again from 2022 onwards as major producing nations have reduced their replanting activities.

Manufacturing businesses that use rubber as feedstock for processed goods will feel the heat from higher raw material costs if there is a natural rubber shortage.

They include glove makers, tyre producers and industrial products manufacturers.

The Association of Natural Rubber Producing Countries (ANRPC) forecasts a 1.3% supply deficit in 2022, followed by 4.34% and 7.27% in 2023 and 2024 respectively

ANRPC secretary-general Nguyen Ngoc Bich says there is a general trend of growers scaling down replanting and new planting exercises due to the low price environment.

“Farmers will likely observe the trend for another year if the rubber price remains low.

“If the situation prolongs, the planters will have to fell the trees in favour of other commercial activities or switch to more profitable crops,” Nguyen tells FocusM at the sidelines of the Global Rubber Conference.

If an increasing number of farmers opt to grow other better-yielding crops, the supply of natural rubber cannot catch up with global demand.

Eventually, a deficit in world supply and demand will likely emerge in 2022.

World demand for natural rubber is expected to expand at an average annual growth rate of between 3.4% and 3.7% from 2018 to 2024.

 

Growth and decline

This is against the backdrop of an expected 1.2% growth this year. On average, world demand for natural rubber grew at 3.25% from 2013 to last year.

Production wise, supply will grow at 5% this year, then 4.8% and 5.5% in 2018 and 2019 respectively.

It is projected that supply growth may decelerate to 2.6% in 2020, and slide further to 0.5% in 2023.

These projected supply figures are in tandem with a boom in rubber planting back in 2011, when the commodity experienced a bull run in price.

The Tokyo Commodity Exchange (Tocom) Ribbed Smoked Sheet (RSS3) futures which are quoted in Japanese yen rose to RM19.78 per kg back in 2011 from below RM5 in late 2008.

The bull run lasted about two years before the price declined to about RM8 per kg in 2012.

The commodity dipped further to below RM5 per kg in 2015 due to global production surplus and declining demand, especially from China.

The Tocom RSS3 futures set the tone for tyre rubber prices in Southeast Asia.

RSS rubber sheets are used in the production of tyres, tubes, tread carcass, extruded hoses and footwear among others. The tyre industry is the largest consumer of RSS3 rubber sheets.

However, such impulse replanting activities suggest that farmers might not be able to enjoy the commodity price hike.

This is because it takes about six years for rubber trees to grow to a stage where it is economically viable to harvest latex.

However, if the market is flooded with an abundant supply, it will stifle the upside of commodity prices.

Given the unpredictable supply of natural rubber, it will be a challenge for market players to forecast rubber price trends.

Phillip Futures Sdn Bhd senior derivative specialist David Ng reckons that overall, planted trees in Thailand remain saturated and new plantings have not recovered fast enough to pick up the production slack.

“Thailand may suffer a bump during the transitional phase. As it is the largest rubber producer, lower production may alter the supply dynamics and push prices higher,” he says.

The ANRPC expects that in Thailand, planting of new rubber trees will total to 54,400ha this year. This is a far cry from the 290,600ha in 2011.

As in the case of Indonesia, total new planting increased 15.87% year-on-year to 73,000ha, from 63,000ha the year before.

Malaysia too is increasing new planting with an expected 50,000ha. The three countries produce nearly 70% of the world’s natural rubber supply.

Nguyen agrees that the trend of replanting or new planting when the commodity price is high is imminent among rubber growers.

That is also a concern needed to be addressed by industry stakeholders.

 

Free market

“Government intervention works in certain ways. It may promote the crop by recommending that farmers plant rubber.

“But ultimately the farmer’s income is the priority. Very few governments subsidise farmers for planting rubber today.

“They prefer the free market system where prices for goods and services are determined by the open market and consumers,” he says.

The laissez-faire concept also stresses on fair trade laws. Hence, the forces of supply and demand are free from any intervention by governments, price-setting monopolies or other authorities.

But Thailand, which is the largest natural rubber producing nation and responsible for one-third of world output, took measures in June to help rubber farmers and stabilise falling prices.

World total output is about 12 million tonnes at the moment.

The country’s measures included extending a 10 bil baht loan programme for agricultural cooperatives for three more years, and another 10 bil baht loan for rubber businesses.

The government will also continue to pay a direct subsidy of 1,500 baht per rai (0.17ha) for up to 15 rai per household to help farmers cover the cost of rubber production and their living expenses.

On the other hand, several Thai government agencies have offered to buy natural rubber to help contain its plunging domestic market price.

Meantime, the International Rubber Consortium, which counts Malaysia, Indonesia and Thailand as members, has long been lobbying for all producers to agree to a production cut.

Minister of Plantation Industries and Commodities Datuk Seri Mah Siew Keong says the volatile global rubber price has been a huge concern for local industry players which include some 450,000 smallholders.