Rubber farmers resist lure of prices at 56-year high

SINGAPORE/TOKYO (Reuters) - The surge in natural rubber prices to their highest levels in half a century is sending producers a dangerous signal to increase output -- just as a global economic downturn threatens to slash demand.

But analysts say growers in Thailand, Indonesia and Malaysia, which together account for more than 70 percent of global output, are likely to resist the temptation to plant more trees, with memories of a supply glut a decade ago still fresh.

The result: a market likely to remain finely balanced between surplus and deficit for several more years.

“I’m sure there is an appetite to grow more trees when prices are very high. But I don’t think producers will be aggressive in doing that when the demand outlook is getting gloomy,” said Shuji Sugata, manager at Mitsubishi Corp Futures and Securities Ltd.

“It takes several years to grow rubber trees. Producers have seen in the past that overproduction has resulted in pushing down prices severely and they want to avoid this outcome.”

Cash rubber prices have risen more than 19 percent this year after a combination of dry and wet weather curbed supplies in Southeast Asia and oil hit a record near $150 a barrel, making synthetic rubber, derived from petroleum products, more costly.

At $3 a kg, rubber prices in Southeast Asia are up six-fold from the start of this decade and at their highest level since 1952, when the Korean War sparked a commodity boom.

And though synthetic rubber is now far more expensive, at around $5 per kg, tire makers have limited flexibility to switch between the two sources.

Some moved to adapt their factories to produce more synthetic rubber after prices for the natural product nearly doubled from mid-2005 to mid-2006 just as oil cost about $70 a barrel, but tire makers will probably think long and hard before altering production lines again to use more natural rubber.

“For rubber tire makers, it’s not that easy to swiftly fix the line to shift the balance between natural and synthetic rubber,” said Hisaaki Tasaka, market analyst at Ace Koeki Co Ltd.

LIKE IT’S 1999

Just as many in the oil industry are still haunted by $10 crude, rubber producers remain shy about increasing output after prices dropped below 50 U.S. cents a kg in the early 2000s.

The trigger was the 1999 collapse of the International Natural Rubber Organization, the world’s last producer-consumer commodity pact, after Thailand and Malaysia pulled out of the body, accusing it of failing to shore up prices.

INRO’s demise left the market awash with tonnes of unsold stocks and millions of smallholders struggling to make ends meet. Now, they are anxious to avoid another glut, especially as the market for their product looks increasingly uncertain.

Automobile sales in China, the world’s largest rubber consumer and the second-largest car market, grew 17 percent to 3.61 million units in the first half of 2008 -- a quick rate by most standards, but notably less robust than the 20-percent-plus annual growth registered since 2005.

“Some tire makers in China have slowed down their production or even closed down,” said Lukchai Kittipol, president of the Thai Rubber Association.

tire makers consume about 70 percent of the world’s natural rubber, with China alone importing about 17 percent of the world’s freely traded supply.

In Japan, Toyota Motor Corp 7203.T, the world's biggest automaker, and No. 2 Honda Motor Co's 7267.T have slashed their sales forecasts as they battle rising costs and a crumbling U.S. auto market.

Asian tire makers, such as Bridgestone Corp 5108.T, Kumho Tires Co Ltd 073240.KS and Gajah Tunggal Tbk GJTL.JK, have raised prices to offset their costs, but the gains have failed to keep pace with the rise in raw materials.

Gajah Tunggal, Southeast Asia’s biggest tire-maker, has increased prices twice this year for a total of about 11 percent.

Global leaders Michelin MICP.PA and Bridgestone Corp 5108.T are cutting their profit forecasts in anticipation of the impact of rising raw material prices.

High fuel costs and falls in car sales prompted the Japan Automobile tire Manufacturers Association in mid-July to cut its demand view for vehicles and motorcycle tires by 1.1 percent to 132.8 million tires in 2008 from a December forecast.

The International Rubber Study Group said in April it expected demand for natural rubber to grow only 0.6 percent to 9.773 million tonnes this year, much slower than last year’s 5 percent rise, warning that a waning global economy caused a slowdown in growth at the beginning of the second quarter.

Supplies remain tight after output fell in some producing countries last year, when heavy rains disrupted tapping, according to the Association of Natural Rubber Producing Countries (ANRPC), whose members account for 95 percent of global output.

For the moment, growers remain optimistic that supply-side issues, such as erratic weather and seasonal effects like the dry wintering season, will keep a floor under prices.

“Even if there’s a decline in prices, it will be gradual and temporary,” said Edy Irwansyah, secretary of the Indonesia Rubber Producers Association’s North Sumatra branch.

Editing by Ben Tan and Jonathan Leff