Rubber trees during wintering season
The world financial crisis has without doubt dramatically impacted the important rubber producing segment of Cambodian agriculture. Cambodia had hoped to increase its output drastically in order to broaden its economic base from just three current mainstays – garments, tourism, and real estate/construction. As so often, a continuing increase in world rubber prices led decision and policy makers to believe that this segment held promising prospects for the future and propagated and encouraged in many speeches the cultivation of rubber trees.
Many a private real estate speculator, having made some money by selling a piece of land, turned to this industry and started a rubber plantation. One needs to take into account, though, that a plantation will not begin to produce latex until 5 to 6 years after planting the first seedlings. Neversteless, private investors are increasingly seeing natural rubber as a good business. They may now have developed some doubts, though, about their recent decisions to go into this industry.
Soy bean field to be replaced by rubber trees
Rubber tree seedlings
The mostly state-run rubber industry in Cambodia, plantations and processing plants, were or are in the process of being privatized. But estimates still put the state-run producing segment at 70%, whereas the worldwide average of privately-run operations is about 80%, most of them small-holder with sizes of less than 10 ha.
The current total acreage of trees older than 6 years is about 80,000 ha. The number was 70,000 ha in 2007 but in the meantime many new plantations have trees mature enough for tapping.The overall available acreage suitable for the cultivation of rubber trees due to appropriate soil properties is estimated to be up to 350,000 ha. Most of that area is located in Kompong Cham, Kompong Thom, and Rattanakiri provinces. But I have even seen plantations being started in Koh Kong province, formerly not considered ideal for rubber plantations.
Since it appears that all, but one, world-renowned economists, world-leaders, and other politicians did not foresee the economic collapse brought on by the irresponsible marketing of basically worthless securities and other financial instruments (derivatives), the leaders and politicians in Cambodia can hardly be blamed for their enthusiasm in promoting the cultivation of more diverse economic sectors such as rubber – rice, cassava, jatropha would be the other ones that come to mind. It stands to reason that a formerly significant rubber producing country would go back to its erstwhile core industry, especially in view of increasing worldwide demand caused by the emergence of China and India as great economic driving forces in the world. After all, these two countries contributed greatly to the exorbitant levels of oil prices until May this year.
Oftentimes, however, the most basic facts of commodity pricing are overlooked by even industry insiders. Commodities are cross-indexed, that is to say, several commodities rise and fall in tandem, like oil and rubber, or rise and fall in opposite direction to each other, like the US-$ and precious metals. Currencies play an essential role, as one might guess. Worldwide commodity trading is done in US-dollars, in other words, any fluctuation of the dollar will be reflected in local commodity trading centers.
Needless to say, that the current world financial crisis wouldn’t bypass the rubber industry. Slowing, stagnant, or falling consumer demand will lead to across-the-board decreases in demand for essential commodities for each respective industry. The auto industry is seeing almost unknown diminishing sales. The U. S. is the largest single market in the world, whether it is automobiles, garments, housing, or entertainment. So far, at least from what I can see, the U. S. market has been hit hardest, as might be expected from its being the cause of the crisis. It seems like the U.S. consumer has stopped buying. Only Wal-Mart and other discounters report increasing sales. The credit squeeze is a significant part of the problem. If the U. S. stops or reduces consumption the effects will be felt in China, India, and, yes, Cambodia.
Declining auto sales combined with more frugal driving will result in falling oil prices as supply exceeds demand. Speculators contribute their share when they only see doom on the horizon. One would have expected oil prices to fall 50% from its high of almost $150, but is now hovering in the $50 range, and some analysts see it at $40 within a month. The effect on the rubber industry is rather easy to see. Fewer autos built and sold - fewer tires will be needed. Synthetic rubber, the great competitor in several industrial applications and based on oil, suddenly becomes cheaper to produce. High oil prices led to the replacement of synthetic rubber by natural rubber. We are now seeing the opposite movement.
The rubber industry in Cambodia is now feeling the harsh realities of world economics. Cambodia had virtually no own marketing of its natural rubber products. Previously all its rubber was sold to Vietnam, which resold it to international markets. In the past few years, however, Chinese, Korean, Singaporean, and Taiwanese buyers stepped in. But all these countries are now suffering from their own economic woes.
The result for Cambodia is that latex prices fell from a high of KHR 11,000 to KHR 4,000 per kg. Crepe rubber of the CSK5L was down from $2,500 a ton to $1,600. That’s the bad news. The good news is buyers are still buying. But no one knows how long that will continue. Most of the harvest is brought in from September to January. After that there is a usually one-month long wintering season without any production. Some processing plants have already stopped buying intermittently to soften the impact and curtail supply. But they are heavily invested in machinery and have to make payroll. They can’t just leave their plant sit idle for long; likewise plantation owners, and mind you, most of the private plantations are small-holders. They may have recouped their initial investment in land, trees, fertilizer, etc., in previous years but a stoppage of tapping leaves them without income.
Depending on how lean their operation is many plantation owners are on the brink of profitability or losing money at the current prices already. The production of 1 kg of latex costs about $.60 to $.70, amortization of trees, equipment, etc. runs to about $.35. This does not include the cost of land assuming that the value will either appreciate over the lifetime of the plantation or stay the same. One can safely assume, however, that it will appreciate. I have never seen land anywhere that wouldn’t appreciate over a period of 35 years. The bottom line is that owners aren’t making money on those low prices.
The picture is not much different at the processing plants. One big problem for Cambodian plants is that they have to discount their prices heavily in order to stay competitive. They still have to play catch up with their international reputation. Even though the quality of most privately produced crepe rubber is equivalent to Thai, Malaysian, Vietnamese, or Indonesian rubber the long years of neglect in the last 25 years or so have left their mark. This combined with low market prices puts all processing plant owners in a very precarious position.
It is, of course, not known how much reserves owners of both plantations and plants have built up over the last years but this will be crucial for their survival in the next few months. The question for both is whether or not they can endure a longer period of no income, or even losses. The wintering period lasts about 1 month, some take two months. During that period plantation owners still have to make payroll. Plant owners do not face this problem as they will have stockpiled crepe rubber for sale during these months. But with slowing demand the biggest stockpiles won’t help.
Investment in a processing plant starts at about $500,000 to $700,000 depending on capacity - $1.0 million is no rarity. I don’t know any plant owner that didn’t use their own money – so no loans, at least for the most part. That’s the bright side. They probably have enough reserves to ride it out for a few months. But the typical small-holder probably doesn’t. They will be hanging by their fingernails come January, February 2009. Whether they can survive will in large part depend on how quickly all those bail-out and kick-start programs by the U. S. and European governments will take effect.
The rubber exchanges in Asia moved in step with the stock-markets, more or less anyway, usually with a delay of a day or two. But neither stock nor commodity exchanges are a true reflection of reality. Hype in speculation may lead to a vast overpricing of a stock and result in an unrealistic market capitalization of those corporations, or on the opposite side, a ridiculous undervaluation of a manufacturer or bank. Stock exchanges rarely go any more by what the assets, liabilities, and profitability of a company is, which used to be the basis of the valuation of a company. Likewise the current price of rubber does not reflect the true picture as it relates to supply and demand, which by any economic standard should be the determining factor in finding a price of a commodity. No doubt, there is a current oversupply. But would that oversupply lead to a 50% and more price drop? I don’t think so. Equally without doubt, the current price levels include a certain psychological deduction. How much? Hard to say – this is an intangible, and who can really assess intangibles.
So now what are the prospects of natural rubber in the short and medium term then? On the upside, automobiles will still be built. They will be built in increasing numbers, make no mistake about that. They just won’t be so big and will be more fuel-efficient. Even if they didn’t burn gasoline any more, they would still need tires. Fortunately, there is no replacement for tires. And natural rubber will remain to be the main ingredient as studies and tests have shown that fully synthetic rubber tires are not nearly as rugged, resilient, and wear-resistant as natural rubber tires. Other automobile related parts, motorcycles, and bicycles are another important segment of rubber-based industries. Then there is the huge medical industry throughout the world. Just think latex gloves and medical equipment and you are looking at a steadily rising demand. Fully two-thirds of the world population has little or no medical care. Health care will be one future growth industry in decades to come. Additionally, oil prices – again, oil being the basis for synthetic rubber – will stabilize at a sustainable level. Analysts say this will be around the $50 to $60 per barrel mark. Rubber saw an upswing even when oil prices were at $30. So consequently, there is no reason to believe that a natural product, which replenishes itself, as opposed to oil, is bound for extinction in a multitude of applications.
Well, this is the grand picture, but what about the next few months up to one year?
All the economic pundits say that this recession will last more than 12 months, but that doesn’t mean it won’t recover sooner. In order to avoid massive layoffs auto manufacturers, and these are the most visible and significant players and, therefore, will have a great psychological impact, need to get on a sound footing again and start selling their cars. Consumers need to start spending again. This can only happen when the banking crisis is under control and all those bail-out plans are in place and working. Once this has been accomplished, and these programs simply must be implemented, and the first results become visible, this will most likely also signify the end of the current low rubber prices. I don’t think they can go much further down than at present.
The wintering season will help bring down stockpiles. Additionally, the first months in the harvesting cycle aren’t as productive as the second half. Thailand and Vietnam have signaled reduced production on account of the current market situation. There are reports that many a small-holder will stop operating their plantation next season. This will all lead to a leveling-off of the natural rubber supply in international markets, eventually leading to a stabilization of prices. Don’t expect an increase to over KHR 6,000/ kg the entire next year, though. Only 2010 will possibly see a slight increase to prices higher than that. But don’t hold your breath. What used to be a sure bet 10 or 20 years ago is no longer true now. Now nobody can see more than three to 6 months ahead, everything else is just like reading tea leaves. All those highly paid analysts are wrong 98% of the time. So the best thing an owner can do is build reserves, never a bad thing, and ride it out. Better times are sure to come. If they can go without profits for a year, they’re probably ok. If they can’t, perhaps they should start looking for other sources of income. But if you can, don’t sell your land – the market is down as we all know, so you would lose twice. Another cash crop might be the way to go, but that would be a subject for another time.
All in all, I believe the next 9 months will be tough, but as always there is a silver lining on the horizon, even for us rubber people.
I am the owner and co-owner of rubber plantations in Cambodia.
Yours truly KJE