Natural Rubber and the Euro Crisis Revisited

The Phnom Penh Post reports the PM announced that Cambodia will set up a rubber production and export promotion policy in view of increased global demand of the commodity.

The Mong Retthy group even has 2,000 ha of rubber plantation in Sihanoukville province, an area that has hitherto not been deemed ideal for growing rubber trees. Of course, you can plant rubber trees in many types of soil. You just might have to fertilize more heavily.

Mong Retthy also said that such policy would improve the sector very fast. Currently there are about 182,000 ha of rubber trees, both mature and immature, in Cambodia. The official goal is to increase that area to 300,000 ha by 2020.

Mak Kim Hong, president of Cambodia Rubber Association and owner of Chhub Rubber Plantation in Kampong Cham province, said a rubber export goal could attract more investment.

Those statements Mong Retthy and Mak Kim Hong make absolutely no sense to me. In fact, they are complete nonsense. You can set cultivating and export goals, which in itself is fine. But how these goals would improve the sector is something he would need to explain; and how it could attract more investment is also something that lacks any foundation.

Setting goals may expand the area of rubber plantations, as it has done over the past few years, but whether it improves it is highly doubtful. A look at plantations, both producing and maturing, will sometimes paint a different picture. A country attracts investment, regardless of industry, with favorable investment parameters, e. g. tax breaks, special incentives, etc., that are beneficial for the investor and, more importantly, if the investment will earn a nice return.

People cultivate a crop, e. g. rice, as there is local and international demand for it. You can’t practically go wrong with rice as a basic staple for the majority of the world population, notwithstanding the recent flooding of huge areas of rice paddies. Of course, the same goes for rubber. Cambodia has been a rubber producing country since French colonial days. Along with the avowed emphasis on agriculture as one of the main sectors rubber was once again included in official policy as a major product.

The increase in rubber plantations was immense over the last 3 – 4 years; from about 80,000 ha to about 182,000 ha now. Especially Vietnamese and some Chinese companies came in and obtained huge land concessions for rubber plantations. Local smallholders turned to rubber as well, seeing it was official policy and second it was a profitable undertaking. However, that last part is open to debate.

I refer to my post about the Euro crisis and Rubber Prices below. Since then prices have dropped to $3,400/mt for the equivalent of CSK5L on the Malaysian Rubber exchange. A price level we last saw in March of 2010. The difference then was that prices were on an upswing that culminated in over $5,000/mt whereas now that mark was now hit on the downswing; and there seems to be no end in sight.

Prices for CSK5L on the Malaysian Rubber Exchange for November 2011

It is exactly these wild fluctuations that can make or break an entire sector. All of a sudden, people that have invested in a rubber plantation find themselves in the unenviable position of having no return on their investment. After all, they had to wait for 6 years before they could even produce some cash flow. If the downward spiral of prices continues as in the past month that cash flow will be negative.

The following graph for smaller plantations illustrates this, although I very much doubt many a smallholder, and I am sure even some of the larger operators, will realize this. This is based on an investment of $5,000/ha, a production of 1.3 mt /ha p. a., and expenses including operation, amortization, capital expense, but no owner’s benefit. Values are in US dollars except for price/kg, which is in KHR. Naturally, prices for latex are understood to be average per year.

As we can see the breakeven point is at about KHR 7,000, if prices drop to KHR 4000 per kg the owner is losing big time. And it is not that we didn’t have this before. 2008/9 is still in vivid memory. Then prices dropped even below that KHR 4,000/kg.

If the investment is $10,000/ha because of higher land prices and with a medium production the picture looks like this.

It should be noted, though, that the above examples apply to plantations that were started from scratch, with purchase of land, clearing, planting, etc. The whole scenario is radically different if you look at the purchase of a working plantation or one on concession land.

If the investment is $20,000/ha for a working plantation of a little older trees and higher production the picture looks like this.

I will look at the parameters for concession land in a later post.

Looking at the news coming out of Europe, one is inclined to think that the same thing will happen again. What got the ball rolling was first Ireland, then Portugal, then Spain, and finally the worst case of all that in disturbing clarity – Greece. But now Italy is in the crosshairs, and even France is struggling to keep its stable standing in the financial world. Germany, the European powerhouse, with its stubborn chancellor is unwilling to do more than what has already been decided, which leads to great insecurity in the financial markets. The Hang Seng index hasn’t seen positive territory this entire month, it’s a permanent up and down in all the other major markets. Why? Because the signals coming from the European governments aren’t clear enough to make the markets gain confidence to buy their bonds. US banks got rid of their European exposure at the first sign of trouble there. Nevertheless, an unresolved Euro crisis will have its ramifications in the U. S. economy just as much as in Europe proper, with the Asian economies following as most of the Asian products end up on those markets.

I am asking again, ‘Why would this have any effect on rubber prices?’ On the one hand, it is understandable. If countries cannot finance their debts, austerity measures will have to be even stricter, possibly leading to a recession, which many economists predict will happen anyway. Recession means industry output decreases, and rubber will be affected by this as demand drops off. (This is a somewhat simplified explanation.) On the other hand, although nothing concrete has happened that would signify a decrease in demand, the fear of financial markets nevertheless provokes this rollercoaster ride. After all, China’s economy, the largest buyer of natural rubber, still hums along at over a 9% growth rate. Even Cambodia’s economy is set to grow by more than 5%. (If prices continue to decline the PM might have to correct his estimate.) So why do we rubber plantation owners have to suffer from this? Because we are at the bottom of the food chain. Speculators dictate the prices of stocks and commodities. As these speculators feel uncomfortable with what is going on in Europe, they get out of financial instruments that might threaten their profits. Rubber at this point in time is just a victim of the machinations of the financial markets – collateral damage, so to speak.

What we all, both big and small rubber operators here in Cambodia, can only hope for is a clear signal that the Euro zone will not break apart, that those practically bankrupt countries, e. g. Italy, Spain, and Greece, will be put on a safe footing, however that is accomplished, and that financial markets again gain confidence to buy those European government bonds. This coming week France and Germany will submit a plan of the financial restructuring of the Euro zone. Hopefully, this will send this long awaited signal and lead to some buoyancy in the market and thus at least stop the decline of rubber prices.

All this, however, leaves most Cambodian politicians and plantation owners unfazed. They see a marked increase in rubber plantations, and that’s enough for them to be optimistic. That this could come crashing down any time seems to elude them completely. Even the garment sector, not to mention tourism, would be exposed to this if this were to happen. Plantation owners are completely oblivious to what’s going on in the world. I thought maybe they would now be more amenable to lower their prices. But they still want a hefty $22,000/ha for a plantation that won’t produce for another year or so.

Bad boys, bad boys, whatcha gonna do when the cops catch you?

Rith (name changed), an elderly 65-year-old gentleman, was afflicted by a syndrome that no longer allowed him to drive a car himself. It had gotten so bad that at one point he had an attack of dizziness while driving and had to stop in the middle of the street. He was completely oblivious to the fact that just at that very moment the PM’s motorcade was coming down that street. The bodyguard details immediately suspected some sinister plot and approached the stopped car with drawn guns. Finding no plot to kill the PM, they swiftly moved the car to the curb and the motorcade proceeded. This happened a little over two years ago.

Since his condition didn’t improve, he decided to hire a driver. He owned one of those Mercedes S320ies at the time. The driver seemingly was a professional who had worked for an Okhna as driver/bodyguard. All these two years everything went well. There were no problems with the man, and obviously he thought that when Rith changed his car to a Lexus LX470 that improved his stature as well. (The Mercedes was too prone to breakdowns what with road conditions in Cambodia.)

A month or so ago, Rith decided to sell his Lexus as he just didn’t see why he would have to spend more than $25 a day on gas alone, and that was for driving in the city only. I occasionally used that Lexus with driver myself to drive into the countryside with business associates and easily spent $200 on gas. He decided to go for a smaller more reasonable car and got a 2007, you guessed it, Camry. Mind you, this car is not bad at all and it is the car of choice in Cambodia. At $27,000 it was a bit on the expensive side, but what can you do as long as the Cambodian government thinks high import duties and luxury taxes of a cumulative 115.325% are appropriate.

The driver, though, seemed to think that was beneath him and quit his job claiming he was busy with his family’s farm in the countryside. Rith hired a new driver but being a suspicious person didn’t quite trust him. In the end, he called the original driver and asked him back. After all, he had been reliable and trustworthy the past two years.

So one day recently he sent him to one of those Cambodian car washes. When the driver didn’t come back after some 40 minutes, he tried to call him but couldn’t get through. The phone was turned off. Now being the suspicious man that he is he had had GPS tracking system installed in all his cars; so the Camry had one too. He quickly checked it on his laptop and to his surprise found that the car was nowhere near on its way to him but was going in the direction of the Ministry of the Interior. The next thought was, ‘That guy is stealing my car.’ He called someone of his family who picked him up, followed the car, and drove him there immediately. He arrived just at the moment when a police officer was about to hand over money for the purchase of the car.

‘What are you doing with my car here?’ To which the police officer replied that the driver was selling it to him for $12,000. ‘Hey, this is my car.’ He produced his registration and ID-card. They promptly arrested the driver.

Now here is where the whole story gets a little murky. The police obviously wanted to pay in Khmer currency. So $12,000 is about KHR 48,000,000 and that’s quite a bundle. On top of it, it was fake money.

Rith was wondering whether the police had entrapped the guy by posing as potential buyers. Because there must be something wrong if somebody wants to sell a 2007 Camry for a paltry $12,000 in Cambodia. On the other hand, the police might sure have a way of producing a new set of ownership documents with which they could re-sell the car either here or ship it to Vietnam. From what I hear smuggling cars into Vietnam is still going on as unabated as in the 1990ies. There is no way of knowing what was behind it, or how the driver just happened to contact or know this police officer.

What now followed was the typical Cambodian dance. The police said if you want to bring charges, we need to keep the car. However, if you want to take it home right now, you need to compensate us for time and effort with $3,000. Whaaat???

Rith has family members working at the Ministry of Interior. Infuriated, he told them the story but they said, ‘Uncle Rith, calm down, bargain it down to $1,000, and be done with it. Because if you don’t they will keep the car as evidence, as they have every right, file formal charges against the driver, and it might take weeks before you see that car again.’ At his age, he had seen a lot and knew, of course, that was the way things operate in Cambodia. So he reluctantly started negotiating and they arrived at $1,500 in fees. He declined to file charges against the driver because that would exactly have entailed that interminable legal process.

So, bad boys, even when the police catch you that doesn’t mean you go to jail (although the driver spent one night in police custody). By good fortune or lucky circumstances, you just might go free despite the (attempted) crime.

The next day, when Rith picked up his car and the driver was released, the driver, his wife, and his child prostrated themselves before him and asked for forgiveness. Will he have learned a lesson?

When I heard this story I was flabbergasted. The driver knew the car had a GPS system installed. Although he probably thought that Rith was a frail old man now who wasn’t really agile both mentally and physically any more, he also knew that Rith was not without connections in the higher government hierarchy. Nevertheless, he tried to steal that car. Perhaps he was desperate for money, or in his mind the opportunity was too good to pass up. We won’t know. As for the police, if you aren’t a really big wheel this is how they work. And a big wheel’s driver probably won’t dare steal his car anyway, now will he?

The Proposed Budget Boycott

After some rather quiet time, the SRP is back in the news. I have been wondering about this, the more so as Sam Rainsy made an announcement in Paris a while back, in which he accused Bun Rany and Hun Sen of murder. Back in 1999, a very popular singer/actress was gunned down in broad daylight. Hun Sen was reputedly having an affair with her and, according to L’Express - a French newsmagazine, his jealous wife hired killers to put an end to the affair. Hun Sen was supposedly complicit in this. It should be noted, however, that there was never any concrete evidence. L’Express published allegations and assumptions, but could not provide any hard proof besides a diary. This latest accusation by Sam Rainsy did not make the headlines in Cambodia. Let sleeping dogs lie?

But now Sam Rainsy made another announcement that drew the PM’s ire. The SRP would boycott the budget deliberations and not even vote on it. It certainly is their right to boycott or not vote on it, but perhaps they should take another lesson in civics. They claim to be the only democratic party in Cambodia but seem to be rather ignorant of the role of an opposition party.

Last time I looked in other truly democratic countries, an opposition party’s function is to make opposite views heard in the forum of a parliament and in the media, put forth alternative solutions and resolutions, introduce laws they think are appropriate, and then vote on it. If they can’t get a majority to pass it, that’s too bad, but those are the rules by which parliaments work. Of course, if you only have 24 seats out of 120 there is practically no chance that you will ever get a majority for any proposal you introduce. But this is also a democratic principle. I can understand that they are pretty frustrated with all this, though.

Again, I grew up and lived in democratic countries, and had intensive civics lessons in school. If a party doesn’t like what’s going to be introduced as a law or in this case the budget, you vote against it. You do not show your displeasure by boycotting it in parliament. This is not a fundamentally democratic action. Either you are an MP or you should just not run or resign. SR wants to make the European parliament aware of the situation in Cambodia, reiterating the government’s mismanagement of funds, the prevailing corruption, and the generally dismal state of affairs in Cambodia. But at the same time, this party has not formulated one viable alternative plan or concept to bring about change in Cambodia. Time and again, they point at corruption at all levels of government as the greatest woe afflicting this country. No doubt it is prevalent, widespread, and probably unabated, never mind the office of the Anti Corruption Unit. Their work is the proverbial drop in the bucket. But boycotting parliament will not stamp out corruption, and trust me, the Europeans along with the U. S. definitely have different worries than looking at Cambodia to see whether the opposition party plays its democratic role or just flails its arms to make wind.

What I don’t understand is that this would provoke a constitutional crisis. Seven SRP MPs have resigned or will resign their seat under a party rotation policy. Parties in other countries have tried that too only to find out that it is not really workable. Given the SRP’s role in Cambodia, it is probably negligent in the great scheme of things. But those seats will be filled with party members from a list. Even if there were to resign at the time of the passage of the national budget, they CPP would still have their majority to pass it. The Assembly still has 120 seats, even if some seats are vacant. At the constituting session of this legislature, it had 120 elected members. If a party does not fill the seat it won at the election, it will just remain vacant.

It also appears somewhat nebulous how Sam Rainsy interprets the constitution. I believe he needs to take a few more civics lessons or at least consult with a competent constitutional attorney before making such, in essence, ridiculous announcements. Of course, thin-skinned Hun Sen as so oftern lost it and lashed out against him before analyzing the situation. It would not have been worth mentioning at all, just like the accusations he leveled at Hun Sen and his wife in Paris. These accusations sealed SR’s political fate in Cambodia once and for all. He is out of it, whether he realizes it or not. He seems to keep his head in the clouds not seeing that besides irritating Hun Sen from time to time, he is no longer a factor in Cambodian politics. Maybe that is why he comes forward with those half-baked pronouncements. Hasn’t he read the U. S. embassy cables dealing with him? You don’t have to be pro-CPP to be against Sam Rainsy and some of his party stalwarts. It is time that the good members leave the party and form their own new party that will have appeal to a broader base, similar to the SRP in its early days. It is time for Md. Mu Sochua to seriously think about this. Her talents are pretty much lost in that party. I am sure there are other intellectuals, emphasis on intellectual not business interests, that would find a home in that new party.