An article in Ka-Set Online on the situation in the rubber industry http://cambodia.ka-set.info/economics/news-rubber-latex-plantations-crisis-081218.html#JOSC_TOP is in need of a comment.
Income cut by 60%
But Vannak, who owns a 30-hectare rubber tree plantation in Chamka Leu in the Kampong Cham province, also reckoned a state intervention would be useful since the price drops have led him to lose 60% of the company's income compared with August this year. “Today, I almost have no money to bring to my family. A 30-litre drum of latex only brings in 20,000 riels (US$5) when not so long ago this price went as high as 90,000 riels (US$22). What we earn at the moment is just enough to pay for workers' wages”, he complained, adding that the company had already had to wait 6 years for the plantation to actually produce rubber latex.
No bankruptcy for rubber producers?
An expert in Cambodian rubber industry, who wished to remain anonymous, rejected for his part alarmist stances. With a tonne of concentrated latex selling for about US$1,000, to him, the sector seems far from going bankrupt and companies are unlikely to close down... According to him, rubber investors are still earning money even though the income at stake is far from being what it used to be. The expert used his own experience in that matter as an argument: in 1998 and 1999, facing the collapse of rubber prices, when an oil barrel sold for an average of US$65, he still managed to make a profit of 2% to 3% . The return on investment was definitely much less important than the interest rate of a placement on an interest-bearing account, he said, but still allowed to a certain activity in the company without major difficulties. Nowadays, considering production costs and the fact that oil prices have dropped to nearly US$45 a barrel, investors in the sector can generate profit that would almost be equivalent to bank interest rates, the expert concluded.
It is clear that this so-called expert must remain anonymous in the face of such blatant falsehoods. Concentrated rubber contains 60% pure rubber. Latex collected from trees in Cambodia typically contains about 30 to 32 %, in other words 10 liters of latex hold 3.2 kg of rubber. Current prices are in the 3000 riel/kg range or roughly 75 cents, in some areas as low as 2000 riels. And this is how and what plantation owners are paid. Operating cost, that is wages, transportation, etc. is about 70 cents. What about amortization? The plantation takes 6 years to produce the first latex. A 6-year investment in a rubber tree plantation will set you back about $8500 to $10,000 per ha including the cost of land, trees, maintenance, etc. Average annual production per ha is 1,500 to 1,800 kg. Using a depreciation schedule of 15 years you end with 36 cents in amortization cost. So where is your return, Mr. Expert? In order to break even you need a price of $1.06, or 4300 riel per kg of collected latex.
The processing plant is not much better off. They have huge investment costs and they typically sell crepe rubber at about 20% below world prices due to a lack of certification and own marketing. Average prices in December have been hovering around the $1,330/mt mark. Their cost as mentioned above is roughly $750/mt. Factor in operating cost and amortization and you are left with a loss. Additionally, virtually the entire production is sold to Vietnam. In hard times like these the Vietnamese simply stop buying Cambodian rubber and sell theirs first. And this is happening now. Rubber plants still process latex but can’t pay the plantations as they don't have any sales. The situation is very grave for small-holders.
Interest rates at prime banks are around 4%. I don’t see anybody making a 4% net profit in the industry right now.That expert better take a closer look at reality.
In order to take advantage from the the growing appetite of the Chinese mammoth and be less vulnerable to price fluctuations, the Cambodian rubber sector might have to jump onto another phase, like its neighbouring countries: transforming rubber latex into products involving a high profit margin. According to the Minister of Agriculture, Cambodia might soon benefit from the technological help and advice of two foreign companies, a Chinese one and a French one, Michelin. According to the Minister, they expressed their interest in Cambodia and are actually studying the possibility of establishing tyre production facilities in the country. These projects should come as a bonus for the Cambodian rubber sector.
Indeed, Cambodian rubber-based industries might alleviate the situation but that is a long way from happening. And don’t forget, tires are for cars. And the car industry is in a even more dire predicament than the rubber industry. For the car industry to come back from that slump will take years. So don’t hold your breath.