The rubber producers globally have been faced with challenges such as low prices, lower yields per hectare and now changing climate among others in countries including India. In an e-mail interview with BusinessLine , Jom Jacob, Senior Economist, Association of Natural Rubber Producing Countries (ANRPC), Kuala Lumpur, says the emerging demand-supply scenario may turn in favour of prices during April-September, though excess supply is seen from October onwards. Edited excerpts:

Do you expect a rebound in global demand for natural rubber during 2018 in the context of faster economic growth anticipated in the US, Europe, India, and a few other major rubber consuming countries?

Global demand for natural rubber during 2018 is expected at 13.33 million tonnes (mt) — up 2.8 per cent from the previous year. This represents a faster growth.

Global consumption grew only by 1.9 per cent during 2017 to 12.9 mt, as per preliminary estimates. Compared to 2017, consumption is anticipated to grow a tad faster this year in the US, EU and India driven by the expected improved economic situation. In China, the consumption is anticipated to grow only by 0.2 per cent in 2018 after the 0.8 per cent fall in 2017.

A long period of low rubber prices should have affected the production sector. What is the outlook for global supply during 2018?

Constrained by the continued low rubber prices coupled with a host of other limiting factors, the yield per hectare is unlikely to improve during the current year.

This is despite rubber research institutes across countries commercially launching improved clones.

Unfavourable prices and lack of resources have compelled majority of smallholders to abstain from proper maintenance of holdings over the past four years, with variation across countries.

This is likely to reflect on the yield potential. However, this factor may be less serious in Vietnam, China and Cambodia where large plantation companies occupy a significant portion of rubber area.

Secondly, the trees which have newly opened for tapping during the past couple of years, are mostly in non-traditional regions.

Due to agro-climatic constraints, the yield potential is relatively low in non-traditional regions. Another factor is the potential adverse effect of climate change which is increasingly being observed over the past few years.

In a few producing countries, farmers have reportedly failed in giving adequate attention to the selection of planting materials.

On the other side, mature area is expected to expand substantially during the current year (2018). Across countries, farmers cultivated rubber lured by attractive prices prevailed during 2010-12.The trees planted 6-8 years ago have now completed the gestation phase. Total area occupied by mature trees in the 12 ANRPC member countries was originally expected to increase by 387,000 hectares during the year.

But the Thailand government is now promoting a shift from rubber to other crops by offering farmers incentives at the rate of about $3,300/ha.

Consequent to this initiative, the expansion of mature area will be much lower than expected.

Global production during 2018 is seen at 13.885 mt, up 5.2 per cent from the previous year. This represents a slightly slower growth compared to 2017.

As per preliminary estimates, global production rose during 2017 by 6.2 per cent to 13.2 mt.

The above figures of supply and demand closely match each other. Does this indicate possibility of prices bouncing back?

Based on the anticipated figures, the world supply during the current year will be in excess by around 460,000 tonnes which is only 3.5 per cent of the world demand. If examined on monthly basis, the anticipated demand-supply position is expected to turn in favour of the prices during the period from April to September 2018. But, excess supply is anticipated from October onwards.

If prices turn attractive, farmers are expected to make advantage of it by adopting various short-term measures to increase the output. The resultant increase in supply can pull back the market from making substantial recovery.

Due to a more influential role played by speculative funds, rubber prices need not always move in line with demand and supply. Crude oil market also has a bearing on natural rubber market. Moreover, the factors concerning commodity markets, in general, are applicable to natural rubber as well.

Therefore, rubber is expected to track, at least partly, the general trends in commodities rather than confining to factors within the sector. In short, one cannot make realistic judgement on the natural rubber prices by looking into supply and demand alone.

When you say, crude oil prices have a bearing on natural rubber prices, why the rubber market did not respond to the rally in crude oil during January 2018?

The ups and downs in crude oil market need not always reflect on natural rubber market. It is largely in speculation that crude oil trends often get reflected on natural rubber market.

As synthetic rubber is petroleum-derived, a rise in crude oil can make synthetic rubber more expensive. Taking this into account, investors in rubber futures often speculate on possible substitution from synthetic rubber to natural rubber.

But, this need not always happen, especially when investors are over-cautious on the influence of other more potential factors.

Speculative investors in Shanghai exchange are over-sensitive to the level of inventory held in designated warehouses.

Investors tend to over-react even to marginal increases in the inventory at Shanghai. Natural rubber inventory went up to 397,000 tonnes at the beginning of January 2018 compared to 299,000 tonnes at the same point of time a year ago. The inventory has gone up further during January 2018 and reached 419,000 tonnes by the end of the month.

The first two weeks of February 2018 have seen the inventory going up further.

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