High prices and tight supply to spur rubber expansions

19 Feb, 2011
Source: brecorder.com

BANGKOK: Rubber prices are on track for successive record highs as robust Asian economies led by China step up purchases, prompting producing countries to expand plantations to capitalise on the insatiable demand. Traders, policy makers and investors head to a rubber conference in Cambodia from Monday at a critical time when tight supply in major producing countries could see prices hitting new peaks up to April.

Soaring prices have encouraged farmers in producing countries to try to tap as much as latex as possible and even plan plantation expansions, though the yield from new tress would only come in about five to six years.

Tokyo rubber futures prices rose to a record high of 535.7 yen ($6.44) per kg on Feb. 18 on supply concerns and hefty speculative buying by investment funds. Surging TOCOM prices have pushed physical rubber prices higher, with the benchmark Thai RSS3 being offered at a record of $6.40 per kg, while other Asian block rubber grades held at relatively high levels, dealers said. "Farmers have also postponed replanting due to current high prices. They will keep the trees although they only get few drops of latex," said Suharto Honggokusumo, executive director of the Indonesia Rubber Association, referring to ageing rubber trees that would have normally been cut down and replanted after being tapped for almost 25 years. The two-day conference in Siem Reap, home to Cambodia's centuries-old temples of Angkor, is likely to provide a world rubber supply outlook and opportunities to expand plantations to make profit from the high prices, traders said. "Rubber prices should stay high as demand outpaced supply," said Luckchai Kittipol, president of the Thai Rubber Association.

However, traders said the current high prices did not reflect the real picture of the rubber market, with some forecasting levels to start easing around mid-year.

Prices could stay high for a couple of months, especially in March and April when Thailand and Indonesia, the world's top two rubber producers, enter the peak of the dry season when trees stop producing latex and supplies fall sharply, traders said. "But prices could ease again in May when supply is expected to rise and funds would take this as an excuse to liquidate long positions and prices should fall sharply," said Vorathep Wongsasuthikul, CEO of Thai Rubber Latex Corp, referring to the end of the dry season in late April, when farmers will resume tapping.

High prices not only encouraged producing countries to expand their rubber plantation to earn more profit, but also forced major consumers to invest in growing more rubber in a bid to avoid paying at record high prices, traders said. "China is an interesting example. It is starting to grow rubber in Vietnam and Cambodia as it tries to produce rubber sheet to feed its tyre industry and avoid importing," Luckchai said. Thai investors are also investing in Laos as Thailand, the world's biggest rubber producer, needs to set aside land for other food crops such as rice and sugar, which are also seeing high demand and rising prices. "We have started growing rubber in Laos for a few years and expected to start tapping for latex output by four to five years," said Luckchai. Indonesia, the world's second-largest biggest rubber producer, also plans to increase its rubber areas. "Small-holder farmers are expanding their rubber plantation. With high prices, farmers who own 10 hectares (25 acres) of rubber plantations are considered rich farmers and it's not that expensive to expand their plantation," Suharto Honggokusumo, executive director of Indonesia Rubber Association. Indonesia expects to produce 3.08 million tonnes of rubber this year, up 10 percent from 2.8 million tonnes in 2010.