Natural rubber prices have rebounded this year, but producers will struggle for another decade with low prices, industry insiders say.
Despite a 16% rise in international rubber futures prices so far this year, rubber is still far from truly emerging from a bear market, according to market participants.
From March 2009 to February 2011, rubber prices experienced a surge, during which they rose as much as 240%.Producers have also been expanding acreage aggressively during a two-year period of rising prices, and now the supply glut is a problem that will be difficult to eliminate in the short term as the rubber trees move from the growth cycle to the tapping cycle.Although rubber prices have risen this year, they are still down as much as 70 per cent from their 2011 highs.
Global rubber production will continue to outstrip demand for tires until 2027-2028, and producer countries will remain Mired in low prices for another decade, according to David Shaw, CEO of Tire Industry Research UK, which has been tracking the Industry for 30 years, according to bloomberg.As low prices reduce acreage, it will take a decade for prices to rise significantly.
If rubber producers used a 10-year cycle in the early years to forecast future demand and determine acreage accordingly, there would be no immediate ill effects and prices would be relatively stable, according to Shaw.He said governments in rubber producing countries should be more careful in managing acreage so as to achieve a balance between supply and demand in the future.
Natural rubber was cut after planting for 5-7 years, high-yield period was 10-15 years, and felling and renovation period was 25-35 years.It is a special commodity, the upstream is agricultural products, the downstream is industrial products, but also has a strong financial attributes.
Thailand is the world's largest producer, accounting for 36 per cent of global output, according to previous data from the hongyuan futures research institute.China accounts for nearly 40 per cent of global natural rubber consumption and more than 70 per cent of that is used in tyre manufacturing, but the growth rate of Chinese tyre production has slowed from 20 per cent in 2010 to 5.4 per cent in 2017.
Faced with the mismatch between supply and demand, it is difficult for natural rubber to reduce production on the same scale as crude oil.Salvatore Pinizzotto, secretary-general of the International Rubber Study Group, said that for Rubber farmers in producing countries, the lack of alternative sources of income means they need to keep producing even at today's low prices, further exacerbating the oversupply.
Zhu ziyue of hongyuan futures research institute also pointed out that the planting area is difficult to exit quickly in a bear market and the planting area is often crowded in a bull market, which makes it difficult to relieve the pressure of rubber inventory.He noted that:
First of all, natural rubber has a long growth cycle and a long rubber cutting cycle, so the production and inventory cannot be adjusted timely due to the existence of a long cycle. In bull market, planting tends to rush forward, while in bear market, planting area is difficult to exit quickly.
Secondly, 90% of the world's rubber production areas are located in southeast Asia, which is operated in the form of small farms and distributed in a scattered way. Moreover, the policy execution ability of this region is weak, making it difficult to realize the supply-side reform that is similar to the domestic unification and with force.
Last but not least, rubber cutting is the economic source on which rubber farmers depend for their survival, and the latter maintenance cost of rubber plantation is low. Although there is the phenomenon of replacing planting or choosing other occupations, there is still no other way to provide a stable cash flow for rubber farmers, so they will not easily choose to abandon cutting or cutting.