Rubber topping plantation investments

Natural rubber has bounced back into investment portfolios with record returns and experts are recommending rubber as the top plantation investment of the future. “We are experiencing record prices for all grades of rubber, particularly RSS rubber,” said Upali Bandaranayake, a Director at Commodity Brokers, Forbes and Walkers Ltd, speaking at a seminar on plantation industry trends organised by HNB and DFCC stock brokers last week.

The price boom for natural rubber is attributed to the linkages to oil price increases and the growing demand for rubber products.
“Synthetic rubber, which is a substitute, in some instances for natural rubber, is a by-product of oil. So when oil prices increase the price of synthetic rubber also increases.

The lowest grade of synthetic rubber was selling at US$ 1.60 per kg in 2006. Today the lowest selling rate is US$ 2.70,” said Bandaranayake. As a result of the sharp price increase in synthetic rubber, demand has shifted to natural rubber. Meanwhile, demand for natural rubber itself, is growing, particularly in Asia, boosted by the transport needs of the growing middle classes of India and China.

“Natural rubber is a raw material for vehicle tyres.As much as 73% of natural rubber produced in the world goes to manufacture tyres, tyre related products and vehicle components.Vehicle sales have reduced in the US and EU but there is a steady increase in Asia, particularly in India and China,” said Bandaranayake.

Last year, vehicles sales in China increased by around 2 million and India sold around one million additional new vehicles to its citizens. The Asian region, together with South America, is estimated to need about 5 million new vehicles per year. Natural rubber will have to supply this demand.

However, the market is also affected by supply shortfalls from major producers due to bad weather. “There is a supply shortfall due to bad weather. Thailand, Malaysia and Indonesia account for about 70% of supply of natural rubber to the world. So bad weather in these countries, that disrupt rubber tapping, has a major impact on supply,” said Bandaranayake. The supply shortfall coupled with increasing demand, have pushed up prices of natural rubber.

“In Sri Lanka the lowest grade of natural rubber is selling at around US$ 2.60 per kg now, compared to about US$ 1.60 in 2006,” said Bandaranayake.

Scientists and traders agree that prices for natural rubber will remain favourable.“I feel these prices will not reduce as long as oil prices remain high. So if you invest in the rubber sector you can’t go wrong,” said Bandaranayake. International market analysts expect natural rubber prices to hold, or increase, until 2020.

“The International Rubber Study Group (IRSG) says there will be no decline in natural rubber prices until 2020,” said Dr A Nugawela, the head of the Rubber Research Institute. The IRSG is an intergovernmental organisation that analyses all aspects of the rubber industry, including production, consumption and trade in rubber and rubber products.

Sri Lanka’s Rubber Research Institute (RRI) is already tapping the natural rubber opportunity. “We have developed clones that are the highest yielding in the world,” said Nugawela. RRI clones can more than double current yields from rubber. The RRI says its clones can yield 3,000 kgs of dry rubber, per hectare, per year, compared to the current national average yield of 1,250 kgs, per hectare, per year.

The RRI says plantation companies can easily increase profit levels with a good re-planting strategy. “The current profit margin of plantation companies is around Rs 90 per kg for a yield of around 955 kgs, per hectare, per year. They can very easily increase their yield to 1,800 kgs per hectare, per year. Then the profit margin will increase to Rs 127 per kg,” said Nugawela.

Scientists also point to other ways of making money from rubber plantations.“The profits we talk about are only from the latex. But there is money in timber as well. Prices paid for a rubber tree have increased. You can sell a tree at Rs 2,000 to Rs 2,500 now. So from 400 trees from one hectare, you can get about Rs 1 million,” said Nugawela. Plantations are also encouraged to tap recently created new markets in carbon trading.

“There are also carbon trading and carbon offset markets. Both are open to investors. One tonne of carbon is now trading at around US$ 25 – US$ 30. The rubber tree absorbs and fixes atmospheric carbon. This is a well recognised service to the environment. So rubber plantations can easily trade in carbon markets. But our plantations are not making use of these opportunities,” said Nugawela.

The RRI says plantations need to consider appointing agronomics experts into their top management, to introduce modern practices that would increase yields and profits. As it is, yields of plantation companies are on average, lower than the yields of small holders. In addition to its money making potential, rubber is also seen as a means of mitigating sudden and drastic weather changes.

“There are weather related disasters happening in all parts of the world. Rubber is a very environmentally friendly tree. So growing more rubber trees will help to mitigate drastic changes to weather patterns. It will help us have uninterrupted weather, which is very important for the entire agriculture sector and the running of the country,” said Dr L. M.K. Tilakaratne, a senior lecturer at the Sri Jayawardenapura University.

The Ministry of Plantation Industries estimates that Sri Lanka will, by 2016, need 150,000 Metric Tonnes of natural rubber for domestic consumption, including value addition activities for exports. To meet this demand projection the current extent of around 117,000 hectares of rubber cultivation must be expanded to 140,000 hectares. As traditional cultivation areas are saturated, the government has already started projects to plant rubber in non-traditional areas like Monaragala.