Agri Business

Will rubber plantations recover if prices maintain their slow rise?

Aravindan Kottayam | Updated on January 16, 2018 Published on October 07, 2016

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A lot will depend on global output and the movement of the dollar

Rubber growers are wondering how long prices will sustain at the current level, and if there will be a trend in favour of the small-holding community. Though price movements have been slow from the second half of April, all stakeholders in the plantation sector are hopeful.

Will the uptrend continue to the second half of the year and into next year as well? That will depend on various domestic and global factors.

In the domestic market, the price increase for RSS 5 was ₹4 in April and ₹8.50 in May. In the first 18 days of June, the enhancement was ₹16.50. The spurt in the domestic market was in tune with the global market.

In Bangkok, from April to June 2, there was a ₹13 increase in the price of RSS 3.

Since the beginning of 2015 all major rubber producing countries have been experiencing a huge loss in production. Thailand accounts for 35 per cent of global production. But in the current year, production for the five-month period from January to May was 2 per cent less than in the year-ago period. The decrease was 6.5 per cent in Indonesia, 6.7 per cent in China and 24 per cent in India.

In all countries except China, 90 per cent of the production is by small growers. The price slump made tapping and maintenance unattractive for over 2 crore growers. Some were compelled to minimise tapping days and even discontinue it.

Though in small numbers, some growers cut down trees and opted for other crops. In major rubber growing countries, production plummeted considerably.

Other factors

El Nino proved to be another reason for the fall in production. The unprecedented summer in the Hainan Islands in China brought down production there.

In addition, there were certain domestic developments in Thailand that hit production. The military government identified 880,000 hectares of land with rubber as being unauthorised. The government plans to cut down rubber trees on 2,40,000 hectares before December.

Consequently, there will be a production loss of 2 lakh tonnes of rubber, according to a report by the Agricultural Economic Office functioning under the Thai Agriculture Ministry.

The ‘World Economic Outlook’ report brought out by the IMF said there are signs of improvement in the global economy.

Meanwhile, it has been reported that the rubber stock has considerably depleted in warehouses at the Chengdu port in China. The port handles 70 per cent of China’s rubber import. As a result of the sudden depletion of stock, the demand from China is expected to improve.

Crude influence

There were also reports that two key global rubber trade companies had deliberately delayed exports to China. This has been interpreted as a bid to create uncertainty over availability.

The influence of crude oil on rubber prices is significant — when the crude price goes up, so does that of synthetic rubber.

Depending on the price difference, dealers in futures trading believe that synthetic and natural rubber can be used alternatively.

So, when the crude price — and therefore the synthetic rubber price — goes up, demand for lower priced natural rubber improves. Futures traders therefore keep a keen eye on crude prices.

RSS 3 in the Tokyo Commodity Exchange ( TOCOM) is a global trendsetter. Trading is done in the Japanese yen, and the traders are mostly from outside Japan. Therefore, the exchange rate between the dollar and yen is the most decisive factor in TOCOM RSS 3 price movements.

When the futures price increases, the physical price also improves globally. In short, currency fluctuations influence the rubber market.

The global market has been started improving since the middle of April. From April 30 onwards the basic import duty on natural rubber in India was enhanced from 20 to 25 per cent.

The cost of importing 1 kg of rubber went above ₹6. Of the total domestic consumption, 41 per cent is imported. The increase in the cost of import pushed up demand for domestically produced natural rubber.

Another factor that helped the domestic market was the weakening of the rupee against the dollar, from 61.8 in March to 62.2 in early April, 63.5 in early May and 64 on June 17. Imports are paid for in dollars, so the weak rupee pushed up rubber prices.

Without the support of global markets, domestic rubber prices showed better trends as a result of the value erosion of the rupee.

In its ‘Commodity Outlook’ report, the IMF says that up to the end of 2016, there are possibilities for price improvements in a small way. But there are constraints on a big global price increase.

In the event there is a big increase, untapped trees in various estates will resume tapping and production will surge, especially in India, Indonesia and Malaysia.

Published on October 07, 2016
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