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The Asian economic turmoil's impact on NR's future.

Natural robber accounts for nearly 40% of the total elastomer consumption worldwide, and the situation is not likely to change dramatically in the near future as the tire industry is not in a position to substitute NR with synthetic rubber. However, the natural rubber industry is facing a double problem: over-supply in the short and medium term, and possible shortage in the future.

On one hand, the abundance of NR today, in spite of a limited increase of the yield in the main producing countries, is due to big investments in the rubber industry in Indonesia and particularly in Thailand during the late 1970s and 1980s (and despite the reduction in Malaysia). The low prices created serious revenue problems for the producing countries, especially to the largely dominant smallholders' sector.

On the other hand, all reasonable projections for NR production and consumption into the years around 2005 indicate a possible shortage of natural rubber (and rubber timber in the case of Malaysia). Low productivity, high labor cost and labor shortage, limitation of suitable land, competition from other crops, insufficient replanting and lack of new planting and existence of serious diseases, are among the main causes.

The financial crisis in Asia started in July, 1997 when the Thai authorities decided to let the Baht float against the U.S. dollar. The crisis then spread rapidly to Indonesia, Malaysia and the Philippines, provoking currency devaluations and the tumbling of the stock exchange. The crisis in the Asian economies was brought on by what UNCTAD describes as a combination of "financial fragility, over-investment and a variety of structural weaknesses." It affected South Korea and then Hong Kong, before spreading to Japan, and acted as a revealing sign. Previously large currency devaluations have been limited to one country (as in Venezuela in 1989, Argentina in 1990, India in 1991, China and Mexico in 1994). The transnational financial contagion or so-called domino effect in Southeast Asia is unprecedented.

How has it affected the natural rubber industry?

Effect of currency devaluations

The natural rubber market is widely expressed in U.S. dollars - more than 90% of worldwide export transactions are made in that currency. Therefore, the devaluations of the Thai baht, the Indonesian rupiah and the Malaysian ringgit had an immediate and direct mechanical effect on the prices expressed in these local currencies. Expressed in U.S. dollars, for the period June 1997 - February 1999, the market price lost more than half its value in a little more than 18 months. In terms of the Indonesian rupiah, NR prices increased 110%. However, in terms of the Thai baht and Malaysian ringgit, prices declined by 12% and 11% respectively.

Effect of currency devaluations on INROs daily market indicator price

The INRO (International Natural Rubber Organization) Daily Market Indicator Price (figure 1) DMIP 80-99 is the benchmark for the market intervention; it is expressed equally in Malaysian ringgit sens and Singapore dollar cents. Operations of the buffer stock are actually guided by the movements of the five-day average DMIP in relation to the commonly called `may-buy' and `must-buy' and `may-sell' and `must-sell' bands.


As the Malaysian ringgit and the Singapore dollar have depreciated against the U.S. dollar, the DMIP consequently appreciated in the same proportion. As a result, in spite of a sharply falling market during the thirteen months from July 1997 to July 1998, the DMIP remained outside the intervention zone of INRO. It even went up to the reference price level when the market showed some signs of recovery in February 1998.

In other words, INRO had not been placed in a position to stabilize the market price, as purchase of rubber was not made possible due to the expression of the DMIP in highly devaluated currencies. This is an unprecedented situation and there is no clear provision in the agreement for the management of such a crisis situation. This has contributed to the further decrease of the market. However, the DMIP entered the `may-buy' zone, at the beginning of August (and subsequently the `must-buy' zone), thus clearing the path for the buffer stock manager to intervene and buy rubber. Subsequently, the lack of funds hampered the efficiency and then hindered INRO's interventions.

Influence of financial crisis on NR supply and demand

It was in 1991 that Thailand became the biggest NR producer and Malaysia became the third after Indonesia.

The higher income, in local currencies, consequent to the devaluations, did not immediately result in the anticipated increase in production. This was due to a number of factors: the adverse climatic conditions (haze and droughts); the lack of flexibility of manpower; the steadily declining prices in U.S. dollars; the uncertainty of the situation in Indonesia; the shortage of containers for export; and the increasing economic difficulties. Even in Indonesia, where the return in terms of rupiah has dramatically increased (in spite of the high inflation rate of more than 100% in 1998), it is only in the second half of last year that a significant increase in production was noticed, but the trend is now on. Thailand's NR export is estimated to have increased by more than 3% over the previous year.

Total NR consumption in Malaysia in 1997 was 326,898 metric tons or 8.5% lower compared to the 357,430 mt in 1996; the estimate for 1998 is 334,000 mt. It has been predicted that figures of rubber consumption in Malaysia would continue to decline over the next two years.

In Indonesia, the data showed that total rubber consumption in 1997 was recorded at 141,000 mt or 0.7% lower than the 142,000 mt consumed in 1996. However, the impact of the currency turmoil has caused enormous economic and financial difficulties, and the future remains very uncertain. The economic and political upheaval in that country has seriously affected the industrial and economic sectors, including the rubber manufacturers.

Total rubber consumption in Thailand in 1997 was 182,000 mt or 4.8% higher than the 173,700 mt in 1996. The currency turmoil, however, will affect the future consumption of NR in that country. Domestic companies, which have been rapidly building up capacity over recent years, are now finding it difficult to access capital.

For these three countries, the advantage obtained on exports due to the devaluation of their currencies was not sufficient to compensate the other factors such as limited industrial integration, an average 50% intraregional trade, decrease of the local consumption and credit crunch. The GDP's evolutions have been significantly negative in 1998: -19.5% for Indonesia; -8.0% for Thailand; and -8.6% for Mala).

In China, signs of a slowdown h. NR consumption began to appear during the first quarter of 1998 and the trend is likely to continue. In India, a country not affected by the currency turmoil, the consumption of natural rubber appears to follow the same limited growth pattern as in 1997 compared to 1996.

In recession-hit Japan, NR consumption began to decline from the end of 1997. Japanese car output fell 8% and sales around 12% in 1998. Sales continued to decline for the 22nd consecutive month in January 1999. In 1998, NR imports into Japan plunged 7% from a year ago to 680,000 mt. In South Korea, the decrease started later but could be even more accentuated.

The Southeast Asia currency turmoil and the Asian crisis would have some direct impact on the use of NR in the United States too as the inputs from this part of the world would be cheaper, as already evidenced in the case of tires and other rubber products.

Europe, as a whole, is still on a positive trend and will be far less affected (with the exception of the U.K.). Moreover, its trade with Asia is three times smaller than what it is with the U.S.

It is obvious that not only are the situations in Southeast Asia, Japan and Korea having an impact on natural rubber demand, but also other recent developments worldwide. The contagion is not confined to Asian countries, but is spreading to other sensitive economies: the political and social crisis and the unraveling economic situation in Russia and the possible spillover on neighboring countries; the growing difficulties in Latin America; and the possibility of devaluation of the Chinese renminbi. They interfere either directly - economic problems and consumption, or indirectly - investors' confidence, capital flows, cost of capital and political uncertainty.

It is worthwhile noting that the slowdown of economies tends to affect NR consumption less because of some induced shift from original equipment tires to replacement and retreaded tires.

Impact on prices

On one hand, one of the consequences of the crisis in Asia is a decline in demand in some major consuming countries in Asia and elsewhere. On the other hand, because of the importance of revenue from NR for smallholders and the benefits from the devaluation on that revenue, NR production is likely to increase in the next quarters. The result is a continuous downward drift of the price. This trend is actually accentuated by several other factors: the higher price in local currencies, especially in Indonesia, induces competition between origins and sales at levels lower than the market; the increased proportion of average-priced long-term contracts by some big tire makers allows them to be absent from the market during long periods of time; the low prices have hampered some countries from selling their stocks (U.S., Russia, Thailand, India); the declining prices of oil feed-stocks and consequently of synthetic rubbers have brought more room for lower NR prices. Also, the intention and decision by some countries to withdraw from INRO have also contributed to the downtrend of prices.

It is interesting to consider the market price, of RSS1 in Kuala Lumpur for instance, expressed respectively in Malaysian ringgit sen, Thai baht, Indonesian rupiah and U.S. dollar, together with the Consumer Price Index in the corresponding countries during the period of 1970-1998 (figures 2-5). In the U.S., Malaysia and Thailand, the evolution of the price of natural rubber during that long period did follow the same trend as the local CPI. In Indonesia, a country of high inflation rate, it remained well below. However, the consequences of the recent sharp decrease of the market in U.S. dollars and of the devaluations in the three producing countries is well evidenced on these graphs versus the recent evolution of the CPI.


Present market situation and foreseeable developments

The financial crisis and the economic downturn in Asia will be deep, serious and will most probably last longer than first perceived. It is unprecedented, and it will have consequences not only on the short-term issues but also more fundamentally on attitudes and on the type of organizational and development issues that will be faced.

Economists are making forecasts within various macroeconomic scenarios, finished rubber products market analysts make theirs. World GDP growth fell below 2.0% last year compared to 3.1% the year before. Natural rubber consumption increase is estimated to have been below 1.5% last year compared to 3% in 1997. A reversal of the trend for demand does not appear likely in the near future.

It is worthwhile to note that the prices of most commodities have also been drifting downwards. The price of crude oil has reached U.S. $10/barrel, a level lower, in real terms, than in 1972 before the oil crisis. In the case of natural rubber, the fact that Asia as a whole is now consuming over 50% of the total production is adding to the acuteness of the problem.

Therefore, this imbalance - the combination of weak demand and relatively strong potential supply, is likely to keep prices basically and fundamentally weak in the short and medium term.

Long-term concerns

The situation will not be critical in terms of supply in the middle term and early long term. This is due to the fact that, on one hand, as explained earlier, we do not foresee a consumption boom in the next few years, and on the other hand, we have to consider the important stocks, as well as the production reserves formed by the present nonexploited areas, by a possible more intensive exploitation and the need for a better revenue. With the foreseen evolution of the main producing countries' productions, one could expect around 7.6 million metric tons in 2005, corresponding therefore to 160,000 additional metric tons on average every year. This tonnage would satisfy a demand increasing by 2.3% per year on average during this period. Without entering into details, we think that such hypothesis, which takes into account on one side the actual situations and trends, as well as the new and additional factors noted higher for the production and on the other side, a moderate growth also due to the saturation of some automobile markets and the beginning of a possible decrease of natural rubber percentage for the supply, could be acceptable.

The tire industry consumes almost three-quarters of the produced natural rubber. Generally today in tires, if NR is not vastly substituted by synthetics, mainly SBR and BR, it is due to technical reasons which are essentially related to a set of specific characteristics. Moreover the, radial technique requires more natural rubber also for its tack and its green strength, useful during the building process. The synthetic polyisoprene, besides its high price, doesn't offer these advantages in particular because of the lack of non-rubber elements. The radialization is not generalized yet neither to all the geographic zones (India and China for example, where it represents only 20%) nor to all pneumatic types (agrarian for example). Even though the proportion of natural rubber in the car and light vehicle tires is only 20% (average proportion in the world), it is around 50% for commercial vehicles, 80% and more for heavyweight vehicles, and reaches almost 100% in some applications (aircraft tires for example).

Will the supply be able to satisfy this demand as this is the case today? The problem is complex due to numerous elements of macro- and micro-economics, sociology, market and competition, technique and politics, which are involved.

Low prices, in fact, are not favorable to the producers or to the consumers, especially the tire companies. Indeed, if it is obvious that the producing countries need a remunerative price level, then it also becomes obvious that, if it is not the case the consumer countries will face a shortage of natural rubber supply in the long term.

Research and development programs, in this prospect, are necessary. In fact, the research in hevea culture, as well as its application, appear to have slowed down. Production gains are expected from the genetic improvement (one can reasonably hope to reach 4 to 5 mt compared to the 2,500 kg obtained industrially today), and from reproduction techniques such as somatic embryogenese - but delays in heveaculture are long. In the meantime, better exploitation techniques and transfer of technology, combat against diseases, shorter immaturity periods, wood exploitation, agroforestry systems and adaptation to non-traditional areas will constitute a panel of solutions.


The present status of the natural rubber market is very dull: prices expressed in U.S. dollars are at 30 year lows, the economies of most NR exporting countries are encountering difficulties and millions of NR smallholders' families are suffering. Even if no further deterioration occurs, it would not be until the second half of 1999 or most probably even later that an improvement could be expected.

Gerard Loyen is acting executive director of INRO. The views expressed are not necessarily those of the member countries.
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Title Annotation:natural rubber
Comment:The Asian economic turmoil's impact on NR's future.(natural rubber)
Author:Loyen, Gerard
Publication:Rubber World
Article Type:Industry Overview
Geographic Code:00WOR
Date:Aug 1, 1999
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