Bouncing Back

Malaysia

Economic News

22 Jul 2010
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Malaysian agriculture will see a revival in rubber, as high prices are bolstering the sector that has struggled in recent years.



The price of natural rubber (NR) is at a 20-year high, and is expected to remain so well into the long term. NR currently sells at almost RM9 ($2.46) per kg and analysts expect it to increase to RM10 ($2.73) per kg, a price not seen since the early 1980s, when increased demand pushed the price into double digits. Current prices are almost twice the 2000 average.



In his remarks at the Fifth International Planters Conference 2006 last week in Putrajaya, Plantation Industries and Commodities Minister Peter Chin Fah Kui enthusiastically announced rubber's comeback.



Global conditions are so favourable to sustain a strong NR market that Chin asserted that that the price of NR will "never again" drop to the RM2.50 per kg mark.



Teo Suat Cheng, chief executive officer of the Malaysian Rubber Export Promotion Council, told OBG that strong market fundamentals have been instrumental in driving up prices. Increased demand from China and India, exacerbated by some level of speculation, has raised the value of NR on the world market.



Such conditions have pushed demand to levels high enough to well outpace supply.



Furthermore, with high oil prices, NR is seen as a viable, cost-efficient alternative to petroleum-based products. NR's main rival in global markets, synthetic rubber, requires crude oil to manufacture.



Many are celebrating the comeback of rubber as the industry struggled for years. Increased demand in the 1980s led to wildly overestimated future projections. A subsequent boom in planting fostered a long spell of surpluses and record low prices.



The hope is that this experience will lead to greater caution in future predictions. According to Teo, due to rubber's delayed yield - up to five years after planting - "it is important for governments and industry members not to go overboard with replanting and new planting - as the surpluses and therefore low prices would occur a few years down the road if supply then is not matched by demand".



Additionally, the Tri-partite Rubber Council (TRC), created in 2002 by the rubber producing countries of Thailand, Indonesia and Malaysia, is helping to implement supply management measures that will help keep prices stable.



This will benefit both manufacturers of rubber products and growers, according to Teo. "Manufacturers are not comfortable with frequent volatility or steep spikes in rubber prices as this makes planning and costing very difficult for them. Producers want fair and reasonable prices at sustainable levels so they can make a decent living and continue to grow rubber," she said.



World market factors also point to more stable prices. The industrial and manufacturing growth in China and India that is driving the current demand is much more sustainable than the factors that led to a spike in demand in the 1980s. Moreover, even if the crude oil prices were to fall, Chin is confident that the prices would likely remain high. According to Chin, a stable price fixed between $50 and $100 a barrel would still be good news for NR producers.



There are signs that the plantation industry might heed the minister's advice. For years, rubber producers have been turning to faster yielding products that bring higher profits. NR production is a slow and labour intensive process. Rubber trees can take up to five years to reach maturity, not offering the quick turnaround of other plantation crops such as the oil palm.



But the palm oil boom has led to concerns about overproduction, particularly at the expense of Malaysia's other plantation industries. In addition, the long-term viability of palm oil use in bio-fuels is not certain, and many sceptics believe that the life span of so-called "second generation" fuels will be short.



In urging the return to rubber cultivation, Chin cited NR's advantages. For example, hilly terrain creates difficulties in harvesting the necessary fruits for palm oil production. "Leave hilly areas to NR," he said. Moreover, a rubber tree can be tapped for up to 25 years, and the wood of exhausted rubber trees is increasingly popular for furniture.



The long-term effects high NR prices will have on downstream users are not yet clear. Manufacturers will need time to adjust to such a rapid increase in rubber prices, and some costs will inevitably be transferred to consumers. This could have some impact on demand.



In the short term, however, the outlook is good. Teo told OBG that current export numbers for rubber products have not shown any decline. In fact, rubber product manufacturers domestically and overseas have recently announced plans to increase capacity.



"Generally, I think the industry is fully aware that prices will remain strong in the near and medium term and to remain competitive, many are already taking steps to improve productivity and implementing some cost-cutting measures," she said.

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