Financial Times

Rubber bounces its way to the top
It’s official, well, maybe. It’s all to do with those pesky motor vehicles (with a little help from rising oil prices and a drop in quantity from other parts). The need for natural rubber (NR) has led to record prices in Sri Lanka, and there seems to be no end in sight.

Prices last week hit record highs, trading at Rs 200 a kilogram, with most companies dealing in value-added products saying that it’s that supply and demand problem — there’s a lot of demand but the supply is just not there. It also should be noted that this hasn’t just “happened”, as in the price hike being a recent thing: no, it has been creeping up for the last six months, but it took a record price for those outside the sector to take note.

As reported in last week’s issue of The Sunday Times FT, Dr. L. M. K. Tillekeratne, Director of the Rubber Research Institute, warned that the price would not drop below Rs 175 per kg any time soon; where he also took a dig at plantation companies, and some scientists, who, in 2002, said rubber had lost its bounce, leading to the promotion of palm oil plantations in the place of rubber ones. He also said that if such a move hadn’t been made there wouldn’t be the shortage and high prices of today.

But is that the whole picture? Not necessarily, it seems, if you listen to those others in the know.

Vish Govindasamy, CEO of Watawala Plantations, puts the blame on high petrol prices, leading to high synthetic rubber prices (as do most value-added producers), and a lack of quality from the leading rubber producers, as in Thailand, Malaysia and Indonesa. Upali Bandaranayake, a director at Forbes and Walker, a broking house, put the majority of blame on car production.
Both men agreed that the price would stay high, with Mr Govindasamy putting it at when the wintering season is over in May, where the quantity of latex released by the tree increases.

Mr Bandaranayake was much more pessimistic, saying prices will stay high for the rest of the year, not falling below Rs 175 per kg.
As previously mentioned, Mr Bandaranayake put the blame firmly on the rise in vehicle manufacturing, especially the tyres, with the likes of India now turning out one million cars a year, as well as China trying to get its hands on as much as possible too. Not helping matters was that over the last six to seven months the world’s buffer stock has also disappeared, leading to a shortage. Mr Bandaranayake said that 70 percent of natural rubber is used in tyre manufacturing, of which Sri Lanka is the world’s largest manufacturer and exporter of solid tyres for off-road-vehicles.

He added that Sri Lankan prices were on par with world prices so there was nowhere to go to find cheaper stocks. As for the 2002 palm oil debate, Mr Bandaranayake went further back to the 1997 Asian crisis. Then, he said, the major rubber producers — Thailand, Indonesia and Malaysia — were severely hit by the crisis and the fall in rubber prices leading to them moving over to what was seen at the time as the “miracle crop” of palm oil for better returns. And from there the idea just started spreading.

As for leading producers of rubber products, they seem to accept that prices are going to remain high for the foreseeable future — something local consumers will not be too happy to hear. Rohan Somawansa, Assistant General Manager, National Sales and Marketing Planning, DSI, said that the price rises of natural rubber over the past couple of months have already led to prices rises at home.

He said that there had also been a move over to natural rubber due to its better quality that has aggravated the situation.

A manager from a leading rubber glove manufacturer, who wanted to remain anonymous, felt that China’s huge appetite for latex and unusual weather in the big three Southeast Asian producers, leading to a drop in supply, led to the high prices, but he was at a bit of a loss as to how long the prices would remain high. He admitted that this could lead to problems when it comes to future pricing, where his company recommends that its clients also follow the Singapore Commodities Exchange over rubber prices.

U. U. I. de Silva, DSI’s Export Director, said that the prices had been high for at least the last two months, putting the problem down to a drop in quality from some overseas plantations, as his company has a high requirement when it comes to natural quality. He said export prices had already risen by between 12-18 percent. As for future demand, he said his company had invested in more trees but there was a five-to-seven-year gestation period.

Mr Govindasamy, whose plantation produces one million kilograms of rubber a year, said that the debate surrounding the 2002 oil palm dispute was not quite as it seemed, especially as far as his company was concerned.

It seems that in that year Watawala Plantations was in the forefront of the decision to change over from rubber to palm oil, but Mr Govindasamy put the record straight by saying the move by his company was purely economical at the time. He said when the company took over the plantation from the previous owner there were large numbers of trees that had been over-tapped, and were thus uneconomical. He said they were replaced with palm oil trees while there was an increase in the rubber tree numbers as well, plus the plantation’s rubber factory was modernised and enlarged.

When contacted at the Central Bank’s Economic Research Department, its director (SS) Thenuwara said that the price was expected to stay relatively high due to demand and the spiralling costs of synthetic rubber. He added that rubber-based products were also expected to continue to be up with the main players in the export market over the coming months, along with textiles, garments, food and beverages. For December’s record-breaking $625 million export figure, rubber-based products accounted for $42.91 million, or nearly 8 percent of the total.

As for Sri Lanka, it is the world’s ninth largest producer and 10th largest exporter of natural rubber. Nearly 60 percent of the natural rubber production in Sri Lanka is used for value-added rubber products, mostly for exported products.

Finally – given the importance on the use of condoms for safe sex particularly in view of HIV/AIDS -- a call was made to a few companies in the condom business, mainly suppliers. The aim was to find out if there would be any unexpected rise in the cost of condoms due to high rubber prices. It seems the answer is no as most companies have sufficient numbers in reserve. So that’s a relief.

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