China's Demand for Natural Rubber to Decrease in 2012   

By Chen Zhongtao, China Logistics Information Center

With slower growth in both the output and sales volume of automobiles, the development of the tire industry in China is also slower, along with the growth of demand for various rubbers. In 2012, the market price of natural rubber in China will possibly adjust downward. There are two main reasons behind this. First, the European debt crisis has not eased and the related geopolitics are becoming more complicated, so the global economy faces a slowdown and even a risk of "double dip recession," resulting in reduced growth of both the output and sales volume of automobiles worldwide. The global demand for rubbers will be slack due to the soft demand for tires. Second, a few years ago, some newly planted rubber plantations started harvesting, the global natural rubber production entered an expansion period, and the tight supply of natural rubber will tend to be eased.

The external environment to be more complex

From the point of international economy environment, the European sovereign debt crisis is still fermenting. The crisis will possible be eased because the parties responsible for containing the debt crisis and banking problems have taken a series of policy measures. However, in the past two years, the euro zone countries have not coordinated on substantive solutions, the debt crisis still faces challenges and the credit rating of some member countries has been lowered. Iran faces economic sanctions and a military conflict between Iran and the United States may take place. In addition, the volatile situation in Syria, and its affects on neighboring states and markets, may worsen. All these factors may result in slowing the current global economic recovery. Accordingly, experts have lowered their projections on the 2012's global economic growth in succession. The International Monetary Fund (IMF) has predicted that growth will be 3.25%, 0.75 percentage points lower than its prediction of September 2011. According to the report, "Global Economic Prospects," released by the World Bank on January 17, 2012, because the global economy has entered a difficult stage, predictions of global economic growth have been greatly lowered to 2.5% and 3.1%, respectively in 2012 and 2013, being 1.1 percentage points and 0.5 percentage points lower than the predictions announced in June 2011. In addition, Goldman Sachs has lowered its projection of 2012's global economic growth from 3.4% to 3.2%. The slowdown of the global economic recovery will result in the decrease of the global demand for rubber.

The international market price of natural rubber is still relatively high

Since 2011, due to various factors like the European debt crisis, commodity prices have dropped significantly. Evan after a drastic decrease, the price of natural rubber is still relatively high. According to data from China Logistics Information Center, the average annual price of natural rubber in 2011 had a year-on-year growth of around 30%. In addition, according to statistics made by the Agricultural Reclamation Bureau of the Ministry of Agriculture, in 2011, the average sale prices of domestic standard rubber (SCRWF) in Hainan Electronic Commerce Center and Yunnan Electronic Commerce Center reached RMB33 258 per ton and RMB33 669 per ton, respectively, up around 25% year-on-year. The average monthly sale prices of domestic standard rubber (SCRWF) in Shanghai, Qingdao and Tianjin were RMB33 930 per ton, RMB33 953 per ton and RMB34 105 per ton, respectively, a year-on-year increase of over 29%.
   In the process of planting and harvesting natural rubber, the planting cost of natural rubber at farm is around RMB4 200 per ton, the cost of natural rubber is no more than RMB10 000 per ton after plus tapping cost. Due to the management expenses, financial expenses, operating expenses and the infrastructure construction and maintenance costs, the tapping cost of the state owned natural rubber enterprises is relatively higher compared with private natural rubber enterprises. However, the cost of natural rubber in a state owned natural rubber enterprise does not exceed RMB20 000 per ton. It is easy to see that at present, the price of natural rubber is far higher than its cost. In the face of macroeconomic uncertainty, the margin of natural rubber is still wide enough to take cuts.

Global output increase of natural rubber

Since 2003, driven by the drastic growth of automobile sales volume and the rising price of natural rubber, natural rubber producing countries began planting a large number of rubber trees.  ANRPC (Association of Natural Rubber Producing Countries) announced in early February 2012 that the global output of natural rubber in the world is expected to climb to 10.45 million tons in 2012, up over 3% year-on-year, and the amount of natural rubber exported from its member countries is expected to reach 7.892 million tons, higher than the previous estimate of 7.685 million tons. ANRPC member countries include Thailand, Indonesia, Malaysia, Vietnam, Cambodia and Sri Lanka, and both the output and export volume of natural rubber from ANRPC member countries accounts for over 90% of the world total. According to IRSG (International Rubber Study Group), the output of natural rubber will reach an all-time high in 2012 and the tight supply of natural rubber in the global market will be eased somewhat. Barring natural disasters, China's domestic output of natural rubber will also increase and reach more than 800 thousand tons in 2012.

China's consumption of natural rubber will decrease in 2012

In 2012, China's economy will maintain a stable and relatively fast growth. The GDP is expected to grow around 7.5%, being lower than that in 2011, and domestic consumption of rubber will also decline.
   Looking at the main downstream sectors, it will be difficult for either the output or sales volume of automobiles to grow this year unless new stimulus policies are released. There are two main reasons behind this. First, the vehicle population in China has exceeded 100 million and in the economically developed cities, there are many car-related problems like traffic congestion, parking shortage and the constantly increasing cost of fuel, plus stronger traffic control and the implementation of purchase restrictions measures, the residents' enthusiasm for buying a car has been reduced. Second, due to the sluggish sales of the automobiles, the inventory of new, unsold cars is estimated to have built up to over 500 thousand and the output growth of some auto makers has slowed down.
   The tire industry is not however completely dependent on new car sales. Even though the growth of auto sales is likely to decline, the huge population of vehicles in use plays an important role in the growth of tire consumption. It is expected that the output of tires will still grow rapidly. However, it cannot be ignored that the survival and development of the tire industry faces great pressure, especially in the performance of the export environment deterioration. The negative impact of the USA's special protection tariff on Chinese-made tires since 2009 still exists and special labeling of tires will also become compulsory for all tires in the EU - China's second largest tire export destination. In addition to the tire special trade practices investigations conducted by the United States and India, more than ten countries have conducted dumping investigation on China-made tires, forcing China to decentralize control of tire export. At present, although China's overall tire export volume has not declined greatly, the proportion sold to major countries has fallen drastically, and the consequent diversification of export destinations has greatly increased trading costs, making the export situation grim, financially.
To sum up, natural rubber prices will possibly adjust downward in China's domestic market this year. Natural rubber is an agricultural product and is greatly affected by geographic and climatic conditions. Whenever a natural rubber producing country suffers a big natural disaster, its output of natural rubber is significantly reduced. The conflict between Iran and the United States and the volatile situation in Syria have further complicated the geopolitics of the Middle East. The price of crude oil is likely to rise, turning some industrial consumers away from synthetic rubbers. The price of natural rubber is likely to be back to RMB30 000 per ton.

China's output and price rose in 2011

China produced around 730 thousand tons of natural rubber in 2011, up 12% year-on-year. According to statistical data from customs, China imported 2.1 million tons of natural rubber in 2011, a year-on-year increase of 12.9%.
   In 2011, the price of natural rubber first increased, peaking at RMB43 000 per ton in mid February, then fell with fluctuation to around RMB26 000 per ton by the end of 2011. While the year's average price was 2.8% lower than the peak prices seen in January, it was 29% higher than the average price in 2010, according to China Logistics Information Center.