Natural rubber prices remain cyclical

SEATTLE—The world of natural rubber doesn't always fall into neat categories.

NR prices are cyclical but, for a number of reasons, pricing and demand don't necessarily match up in traditional terms, according to Maria Gyftopoulou, a senior research consultant at LMC Tyre & Rubber Ltd., a unit of LMC International consultancy based in the United Kingdom.

Gyftopoulou presented an outlook on the natural rubber industry during the recent International Institute of Synthetic Rubber Producers Annual General Meeting in Seattle.

She explained that prices are cyclical partly because of the way NR planters operate. When prices are low, nobody plants NR trees. That eventually leads to material shortages that drive prices up, so more planting is done. But because it takes a newly planted NR tree seven years to mature and be ready for tapping, in seven years' time the market then typically sees record production, and that pushes prices down.

So in 2018 production levels hit near record levels of close to 14 million metric tons despite prices that remained low, a scenario that Gyftopoulou said can be traced to the record spike in NR prices in 2011 that led to a spike in planting at that time.

Market variables

About 85 percent of natural rubber demand comes from the tire industry, with the rest from general rubber goods, she said. "Clearly, NR demand moves with tire production," she said."

Prior to 2010, the growth was tracing about 5 percent but has slowed in recent years as tire growth has slowed. All growth in tire production currently is coming from emerging markets, Gyftopoulou said, meaning higher demand in those regions for NR. Consequently, NR imports into China have risen substantially from 2004-18, with smaller increases into the Association of Southeast Asian Nations and flat imports into the U.S. and Europe.

Substitution between NR and synthetic rubber also has been a factor that has played into pricing and demand for both material types, she said. When NR prices reached record levels in 2011, the difference between NR and SBR prices was quite significant, bringing an incentive for substitution.

But an LMC study found that substitution often depended on the market and application, rather than just price difference. For example, the consulting group found that Japan had a low level of substitution, even when pricing gaps were higher.

"I don't think in mature markets there is much change with price," Gyftopoulou said. "The products have tight specifications and it's difficult to change compounds for these products."

It was quite a different story in China, she said, with more scope for substitution. In 2014, there was a reduction in bulk SBR, as its prices were higher than those of NR. The LMC data thus showed that the reduction in the demand for SR was made up for with an increase in demand for NR.

In India, Gyftopoulou said rubber product makers traditionally had used a high proportion of natural rubber. Starting around 2005, though, the demand for NR in the nation dropped substantially irrespective of the price. "In that period, India developed its own SR industry," she said, "so it has a source of SR and its tire production started to move more toward international norms."

NR production cycle

Natural rubber can only grow in very specific regions, mainly Southeast Asia and West Africa. The bulk of production still comes from smallholders with small plot sizes, and a Hevea tree typically has a life of 32 years, with seven years to mature and then 25 years of active tapping.

"Tapping is very labor intensive and very frequent," Gyftopoulou said. "There is the possibility to use some stimulants to control the frequency of tapping. The yields can vary, depending on the clone used, the density and the tapping frequency."

Vietnam, Thailand and the Ivory Coast have the top yields in terms of kilograms produced per hectare per year, according to LMC data. Cambodia, China and Sri Lanka have the worst yield rates.

There are seven main countries that produce NR, with Thailand and Indonesia alone accounting for more than 60 percent of the total, she said. And while the tree planting typically peaks in conjunction with periods of high prices, from 2004-08 the Thai government introduced a tax subsidy to boost planting in northeast Thailand, which skewed plantings higher than expected.

Planting also increases for a couple of years after prices peak, Gyftopoulou said. "The reason is you need some time to put your plantation together," she said. "It's not something that can happen so quickly. You have to collect the seedlings, prepare and plant. That's a process that takes some time."

NR prices in real terms have fallen by an average of 2 percent a year starting in the 1950s, she said. To put the 2011 record high prices in perspective, it was the highest prices for NR for a generation.

Some countries adapt NR production to pricing better than others. Malaysia and India, she said, are two nations that respond quickly, reducing output when prices fall and increasing when prices pick back up. The two nations, though, import more NR when their production falls, because both have the capacity to make end rubber goods and still need the material.

Thailand has less of a correlation. "When the prices of NR were falling after 2011, the production in Thailand was rising, which seems kind of strange," Gyftopoulou said. "But if you think at the same time that was the seven-year period after the new plantings were made in Thailand between 2004 and 2008, that is why the production increased. Those trees had matured and they had to start tapping."

LMC did a study to calculate the revenue between natural rubber and different crops in northeast and southern Thailand. In all cases, NR offers higher revenue than other crops, including such commodities as sugarcane, rice, cassava and corn in northeast Thailand, and oil palm and rice in southern Thailand.

"That's another reason that production has continued to rise despite the fact that prices are lower because it will still give higher revenue to the farmer," Gyftopoulou said.

The high prices from 2011 also encouraged some non-traditional nations to boost NR plantings. Natural rubber output in Vietnam and the Ivory Coast has grown substantially from 2012 to today, she said.

Despite the high production levels, Gyftopoulou said the surplus of supply over demand dropped substantially in 2018 as producers did respond somewhat to lower prices. "However, we have not seen any actual reduction in area, just the frequency of tapping has reduced," she said.