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China Holds Key To Rubber Production Rebound

4/3/2009 - Singapore/Shanghai - Rubber dealers expect China's appetite for the commodity to bounce back and pull their industry from the doldrums even as demand shrinks elsewhere, but recent defaults have made suppliers cautious, according to a report in the Business Times. As the global financial crisis puts the skids under the car sector, dealers are eyeing China, despite lingering distrust after it scrapped deals for as much as 200,000 metric tons last year, costing suppliers in Thailand, Indonesia and Malaysia millions of dollars. "If you look at the trend, China will have the quickest recovery," said Djoko Said Damardjati, secretary-general of the Association of Natural Rubber Producing Countries, which accounts for 90 percent of global output. "This opens up an opportunity for us, the producers." The association groups Thailand, Indonesia, Malaysia, India, Vietnam, China and Sri Lanka. China will offset demand declines from Europe and North America and is likely to help cash prices stay above current levels over $1 (RM3.63) a kg, with its consumption expected to take up 30 percent of global natural rubber output in 2009, analysts say. "In 2009, the Chinese rubber industry will still maintain a rapid development," Fan Rende, president of the China Rubber Industry Association, said. "The overall growth rate of the rubber industry is expected to be about 10 percent in 2009." Global demand for natural and synthetic rubber could fall as much as 8 percent this year, but could rebound by 4 percent in 2010, the International Rubber Study Group says. About 70 percent of global natural rubber is used to make tires. China is the world's largest rubber consumer and tire maker, devouring up to a quarter of global natural rubber output each year, but it is also the industry's most fickle customer. The country's tire output is forecast to rise 8 percent in 2009 from a year earlier, to 378 million units, with exports worth $7.3 billion in 2008. Production could reach 404 million units in 2010, the China Rubber Industry Association said, with demand for natural and synthetic rubber expected to rise 7.3 percent this year to 5.9 million metric tons. But the growth comes against a backdrop of Chinese defaults that have upset suppliers. Chinese buyers stunned the market late last year when they refused to pay for their cargoes after prices plunged more than half in the wake of the global economic meltdown that has brought automakers in Europe, North America and Japan to their knees. As tire-grade rubber fell to around $1 a kg from July's 56-year peak at $3.25, Chinese buyers refused to take the cargoes, forcing sellers to cut prices. Dealers said the Chinese buyers had earlier agreed to buy the rubber at $2 per kg. Even so, suppliers realize they have no option but to deal with China. Some of the defaults are being settled through arbitration, with the Singapore Commodity Exchange now handling 10 cases - its highest figure in the last decade. There are signs China is keen to shake off its bad reputation as it strives to keep afloat its tire manufacturing industry, which employs 200,000 people. "They find that if they want a reliable source of rubber, they have to earn the trust of the suppliers," said Avtar Sandu, manager of Asian commodities at Phillip Futures in Singapore. "The default thing is a lose-lose situation for everybody." Wild price swings are a curse for Thailand, Indonesia and Malaysia, which normally sell rubber to China in a document against payment scheme that allows sellers to ship the cargo to China before payments are settled.

Business Times
www.btimes.com.my

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