ALTHOUGH smallholders welcome the move announced in April by several top rubber producers in Thailand and Indonesia to raise their selling prices and stop delivery to the Singapore Commodity Exchange (Sicom), it remains to be seen if the plan will succeed.

It was reported that rubber producers plan to charge a significant premium over the exchange-traded futures contract from the second half of this year. This would mean dropping a system of pegging prices near a benchmark set by Sicom.

Small rubber producers welcome the move as it would buffer their margins against the high cost of production, but the odds seem stacked against them.

“Unilaterally commanding a premium on rubber prices would require political commitment that we have not seen yet,” says a market observer.

“It will be very difficult for a few growers to do so on their own unless they have very loyal customers who will accept higher prices. It depends on the strength of their business relationships,” he adds.

Among the producers named by news reports as intending to raise prices are Thailand-listed Sri Trang Agro-Industry Pcl and Singapore-listed Halcyon Agri Corp Ltd.

Sri Trang has an annual production capacity of 1.2 million tonnes while Halcyon has 748,000 tonnes. The two companies produce the equivalent of 46% of Thailand’s — the world’s largest rubber producer — total production last year.

An analyst with a regional research outfit says for large-scale rubber buyers such as international tyre makers Michelin and Goodyear Tire & Rubber Company, it would be easy to make a switch and source from lower-priced producers instead.

For local rubber glove makers, the sentiment is much the same.

“There is no need to source for new suppliers as we will buy from anyone who gives us the best price,” Careplus Group Bhd managing director and chief executive Lim Kwee Shyan tells The Edge in an email response.

“We source most [of our rubber supply] from Thailand — about 12,000 tonnes per annum,” says Lim, who is also president of the Malaysian Rubber Glove Manufacturers Association.

He adds that a substantial amount of rubber supply for local glove makers is sourced from Thailand too.

“As a commodity, the price of rubber is transparent and will not differ much from supplier to supplier … Our current suppliers have not informed us of a rubber price increase,” says Top Glove Corp Bhd chairman Tan Sri Lim Wee Chai.

Top Glove sources over 100,000 tonnes of rubber latex per annum from Malaysia and Thailand.

That said, he notes that procuring rubber supply from other producing nations would not be as cost effective due to the additional transport cost that would arise.

Manufacturers that have rubber as their raw material have had little to complain about since the price of natural rubber crashed in 2011/2012.

The local benchmark SMR20 on the Malaysian Rubber Exchange peaked in 2011, commanding a price as high as RM17.25 per kg. But prices have since tumbled more than 70%, closing below RM5 last week.

The TSR20 on Sicom also plunged in tandem, by 74% since its 2011 peak of US$5.76 per kg, to close at US$1.52 last Thursday.

Producers have had a hard time coping because they have not been able to cover the cost of production.

“The cost of production in several countries, excluding depreciation and interest cost, is about US$1.50 per kg and it is obvious that with prices hovering around US$1.40 to US$1.50, it will be difficult for plantations to earn a reasonable margin,” local planter Greenyield Bhd’s senior manager of corporate finance and strategy Tham Kin-On tells The Edge.

Even so, prices have begun to pick up since end-April — SMR20 is up 9.8% while TSR20 is up 13.9% — on the back of lower rubber production globally and weak demand from China.

TSR20 prices hit a 52-week high of US$1.57 on May 5, while SMR20 also broke a 52-week high and reached RM5.39 last Wednesday.

In the first quarter alone, China’s rubber imports fell 25% year on year, while last year’s total grew only 4.3% y-o-y to 3.8 million tonnes, according to international agribusiness consultancy LMC International Ltd’s Rubber Bulletin dated April 2015. In contrast, China’s rubber imports grew 15% and 19% in 2013 and 2012 respectively.

The world’s largest rubber producer, Thailand, had an output of 4.25 million tonnes in 2014. But this is only a 2.6% y-o-y growth compared with a 9.7% and 9.3% growth in 2013 and 2012 respectively.

Indonesia follows as the second largest producer globally with 2.98 million tonnes in 2014, a 3.3% y-o-y decline compared with an 11% growth the year before. The third largest rubber grower is Vietnam, which produced 928,000 tonnes in 2014, up 5.2% y-o-y.

Considering the sizeable output, a policy change or government mandate by any one or more of the bigger rubber-producing nations could spell trouble for downstream manufacturers.

The news reports also said that some of these growers plan to halt their deliveries to Sicom, but so far none have done this.

“We understand from the producers that they have no intention of being removed from the Approved Factories list. Neither have we received any official notification that their buyers have been prevented from delivering their rubber to Sicom,” says Sicom head of product management Lily Chia.

The Approved Factories list contains 121 factories — 26 in Thailand, 78 in Indonesia and 17 in Malaysia — whose rubber is deliverable to Sicom by market participants with a sell position at the expiry of the rubber futures.

Sicom consults with market participants including rubber producers such as Sri Trang, Halcyon, Von Bundit Co Ltd and Lee Rubber Co (Pte) Ltd.

For Halcyon, it has not seen a rubber delivery to Sicom in the last five years. “There is no commercial sense in delivering Halcyon rubber to Sicom, as one can obtain higher prices for our rubber in the physical market,” its chief executive Robert Meyer tells The Edge.

“Halcyon’s decision to restrict the theoretical possibility of having our rubber delivered against a Sicom short position was merely to lend emphasis to our point that the Sicom first position does not currently reflect physical spot prices, as has been the case for quite some time now.”

Instead, the company deals with a number of top-tier dealers on a willing buyer, willing seller basis to agree on spot prices because Sicom prices often settle below the physical prices of rubber, Meyer explains.

However things develop, a recovery in rubber prices could not come sooner for plantation operators.

This article first appeared in The Edge Malaysia Weekly, on May 18 - 24, 2015.

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