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Rubber Growers Gain As Oil Prices Climb: Higher Production Costs Hurt End Users

Posted on: Monday, 18 July 2005, 12:00 CDT

Jul. 18--Rising oil prices, a key factor behind the country's economic slowdown, are a blessing in disguise for the Thai rubber industry, which benefits from high prices as well.

"Whenever speculators drive the price of oil higher, rubber futures follow," said Dr Pongsak Kerdvongbundit, managing director of Vong Bundit Co, a major rubber exporter.

According to Dr Pongsak, the prices of the two products tend to go hand-in-hand. Benchmark Tokyo rubber futures last week rallied to a nine-year high on expectations that tyremakers will switch to using natural rubber instead of costlier synthetic rubber, a petrochemical product.

Soaring global oil prices have resulted in a knock-on effect for synthetic rubber, the price of which has for the first time in four decades fallen out of sync with its natural counterpart. This has, in turn, spurred demand for natural rubber as end-users seek a cheaper substitute.

The price of synthetic rubber is normally about US$450 per tonne higher than natural rubber.

However, it must be noted that a drop in inventory in Japan because of falling supplies from Thailand, the world's top exporter of natural rubber, also contributed to last week's rally. Japan buys about 60 percent of its rubber imports from Thailand.

Production in Thailand has been hurt by drought. Rubber output is expected to drop about 10 percent this year to three million tonnes, while global demand is projected to remain strong at about eight million tonnes, up 3 percent from last year.

Dr Pongsak admitted that the current price surge might cause a delay in rubber shipments by Thai exporters, but the impact was expected to be limited.

Rubber supplies normally fall from around February, when the "wintering" dry season starts in southern Thailand. During the season, rubber trees shed leaves and latex output declines.

Production usually returns to normal by early May, but this year drought has persisted in the main producing area in the South, and buyers are still waiting for shipments.

"Thai producers and exporters who sell rubber forward have to negotiate a lot with their clients as the current volatile conditions in the market could result in extensive losses," he said.

However, the delay in shipments is expected to be addressed over the next two to three months as the new output begins to be released into the market, he said.

He said that delayed shipments by Thai exporters had prompted some users to buy rubber block from Indonesia where the output is expected to increase by 10 percent this year to 2.2 million tonnes.

According to Dr Pongsak, on June 7, the price of crude rubber at the Hat Yai central market was 62-63 baht per kg, a gain of 20-30 percent over the last few months.

He voiced support for the government's one million rai rubber plantation scheme, saying it would increase productivity and boost Thailand's competitiveness against the likes of Indonesia and Malaysia.

Currently, Thailand's rubber plantations cover 12.62 million rai.

According to the Export Promotion Department, the country exported a total of 3.28 million tonnes of rubber last year worth US$3.4 billion or about 137.60 billion baht. This year, the Commerce Ministry is projecting exports worth $3.6 billion.

However, while the local rubber market is bullish, end users such as rubber glove manufacturers are complaining.

Prachai Kongwaree, president of Thai Rubber Glove Manufacturers Association, said the price of third-grade smoked sheet which is now about 63 baht per kg, had raised the 70-member group's production costs by US$2.50 to $3.50 per 1,000 pieces.

Rubber latex, a key raw material in rubber gloves, which accounts for 55-60 percent of the production cost, has risen 30 percent in price this year. Because of higher production costs, manufacturers in Indonesia and Malaysia have hiked the prices of their gloves by 10-20 percent said Mr Prachai, who added that local glove manufacturers would likely follow suit soon.

Rubber gloves in Thailand now cost about US$14-18 per 1,000 pieces.

Mr Prachai said that manufacturers had asked the government to set a ceiling on the price of rubber at 60 baht per kg.

The government was also urged to take steps to encourage greater co-operation between the three major rubber glove producing countries -- Thailand, Indonesia and Malaysia -- to monitor the industry. Currently, Thai manufacturers produce over 30 billion pieces of rubber gloves per year, with exports accounting for about 90 percent of the total production. Rubber glove exports generate over 24 billion baht revenue to the country per year.

In terms of production, Thailand is second only to Malaysia which has annual production capacity of about 60 billion pieces. Indonesia is the third largest manufacturer with annual production of around billion pieces per year.

The three countries account for up to 90 percent of world rubber glove production, which has been growing by 10 percent annually.

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Source: Bangkok Post

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