NR supply deficit to increase rapidly.

The International Rubber Study Group (IRSG) reported that the deficit in the world's natural rubber supply will increase to 820,000 metric tons in 2010, from an estimated shortfall of 250,000 mt this year.

The IRSG said years of low prices during the 1990s caused many growers to switch crops and delay replanting. This has lead to a shortage of trees in their peak producing years, since rubber trees usually take seven years to mature.

The IRSG also reported that NR prices have risen 54% in the past year, reaching the highest prices in 20 years. This is fueling fears that the rally is forcing many consumers out of the market, according to the Dow Jones Newswires, but a senior Malaysian government official has said the rally is temporary, caused by the current tightness in raw material supply in major producing countries.

Prices will likely ease when supply returns to its normal level by May or June. "There are no short-term measures needed. It's more a (temporary) lack of supply," said Kamarul Baharain, the newly appointed director general of the Malaysian Rubber Board.

Demand for rubber was already growing faster than supply when the recent floods and heavy rain in Thailand and Malaysia created a shortage in the market, Kamarul said.

Natural rubber prices for March shipment ranged from 191.2 cents a kilogram to 210 cents/kg in the Asian market.

Thai RSS3 grade for March/April shipment was offered at 208-210 U.S. cents/kg, up sharply from 128-129 cents a year ago, while Thai STR20 grade for March/April shipment was at 199-200 cents/kg versus 126-127 cents last year.

In Indonesia, SIR20 grade for March shipment was at 181-192 cents/ kg, up from 119.5 cents a year ago.

Malaysian SMR20 grade for March/ April shipment was offered at 192-195 cents/kg, up from 126 cents a year ago.

Kamarul, who took charge at MRB in January, said a sustainable price for producers and users alike would be about $1.50 to $1.60/kg.

High natural rubber prices may be a bane for users, but Kamarul said they are a healthy correction after years of low returns to growers. It will reignite interest among small producers and plantation companies, and eventually help give the much-needed boost to production, he said.

"Smallholders had suffered long enough from the low, non-remunerative rubber prices," he said. "Some smallholders felt that it was not worth their effort to tap the rubber trees in the past. The current remunerative prices have brought back interest (among) the smallholders," Kamarul said.

Malaysia is the largest producer of natural rubber in the world after Thailand and Indonesia.

In Southeast Asia, where 70% of the world's natural rubber is produced, rubber is mostly grown by smallholders on 2-3 hectare properties.

Once thought a sunset industry, rubber is now looking more profitable to plantation companies who had earlier switched from rubber to oil palm when natural rubber prices fell to just 60 U.S. cents/kg during the 1990s," Kamarul said. "Estates are now thinking of replanting some parts of their land with rubber," though he said it is too early to say how much expansion will take place.

Indonesia, Vietnam, the Philippines and Myanmar are all planning or are in the process of dramatically expanding their acreage of rubber trees, while traditional producers such as Thailand and Malaysia are relying on high-yielding clones and fertilizers to maintain or increase their output, he said.

Kamarul said the expected growth in the automobile industry, especially in China and India, along with high prices of oil, and by extension synthetic rubber, will keep natural rubber prices from falling too sharply anytime soon.

"The outlook for the global rubber market is expected to remain positive in the next few years," he said. "Even though new producers will enter the market and world rubber production will increase, it's not expected that natural rubber prices will plunge in the next few years to the lows prior to 2002, when prices were below $1 per kilo," he said.

New trees typically take about seven years before they can start producing latex, making it difficult to improve supply substantially in the near term.