World components: EIU's December rubber outlook

November 25th 2011

FROM THE ECONOMIST INTELLIGENCE UNIT Demand Growth in global demand for natural rubber (NR) is likely to be constrained by weak growth in the US and the euro zone. As a result, the Economist Intelligence Unit expects global consumption to grow by just 2.9% in 2012. Although this is an acceleration compared with growth in 2011 (when consumption rose by an estimated 2.3%), it is only a modest upturn, and almost entirely owing to the recovery in Japanthe natural disaster that hit Japan in March 2011 caused considerable disruption to global automotive production (the main source of global rubber demand). Although Japan is returning to normality, a vigorous recovery in global automotive demand has been ruled out by the general slowdown in economic growth in Western markets. In addition, severe flooding in Thailand since October has not only caused major disruption to carmakers in that country, a leading exporter in Asia, but also at automotive manufacturing plants in Japan and in North America, owing to a shortage of parts produced in Thailand. The risks to the outlook are firmly to the downside; if the economic outlook were to deteriorate further, automotive demand would be particularly hard hit. In 2013 we expect only marginally stronger growth in global NR consumption, of 3.4%, based on our central forecast of a general improvement in the global economy. Consumption growth in China and India will remain sluggish In China, which is by far the world's largest consumer of NR, real GDP growth is forecast to slow to an annual average of 8.4% in 2012-13, down from 9.1% in 2011. Growth in vehicle sales is estimated to have slowed in 2011, to 8.4%, having soared by more than 30% in 2010, but sales are expected to pick up again in the next two years, growing by an annual average rate of nearly 14.5%. The slowdown in 2011 was primarily attributable to disruption to supply chains caused by the Japanese disaster that resulted in a fall in vehicle production in China in the following few months, and there has not yet been a strong recovery. With the continued substitution of NR with synthetic rubber (SR)reflecting high NR pricesand somewhat slower economic growth, we estimate that NR consumption growth in China eased to 4% in 2011, compared with growth of 7.7% in 2010. We expect demand growth to remain at around 4% per year in 2012-13, but there is a risk that the pace of growth will be slower during the forecast period concerns persist over the potential for major disruption in China's overheating economy, with a bursting of a bubble in the property sector the most likely trigger. India's economy has been growing almost as rapidly as China's, and real GDP growth of around 8% annually is expected to continue in 2012-13. In 2010 NR accounted for 70% of total elastomer usageeven more than in China. However, substitution is also eroding demand (NR accounted for 74% of rubber consumption in 2009). Growth in NR consumption in 2010 was a relatively weak 4.3%, despite a rise in overall rubber demand by almost 10%. Consumption growth will remain relatively subdued, at around 4.2% a year in 2012-13. Floods in Thailand create further disruptions to car makers The disaster in Japan in March 2011 had a significant impact on the country's economic

activity. As well as causing massive damage to the north-eastern coast, the crisis left firms facing shortages of electricity and disrupted transport and supply chains. Vehicle production in Japan was down by almost 60% year on year in April. Most of the overseas facilities of Japanese automotive companies saw output fall because of a back-up in the supply chain of crucial components. Domestic demand was also weak, with motor vehicle sales plummeting by 46% year on year in April. Although recovering in the following few months, vehicle production was still down by 6.5% year on year in September 2011, as car exporters were feeling the pressure of weak global demand and a strong yen. Production in the fourth quarter is also likely to have been held back by supply-chain problems created by the flooding in Thailand. In early October Toyota announced that it was scaling back production at Japanese factories for the third consecutive week and suspending overtime in the US. Honda has eliminated overtime in Japan and is running North American factories at half capacity. There may still be some effort to make up for lost time in early 2012, but even without these latest disruptions, a lack of demand had made it unlikely that Japanese carmakers would run their factories much above normal production levels once fully operational. We estimate that Japan's NR consumption contracted by 4% in 2011. Given that Japan is the world's fourth-largest consumer of NR, this weighed heavily on global demand. In 2012 we expect a rebound in Japan's demand, with consumption growing by 3%, but there will be no sustained period of accelerating growth, with demand set to rise by only 1.8% in 2013. Outside of Japan, developing Asia was the region most severely affected by the supplychain disruption caused by the earthquake and tsunami disaster. For example, in Thailand automotive production fell by 50% month on month in April. The recovery in production was more vigorous than in Japan, with vehicle production up by 28% year on year in September, but the flooding is likely to have severely curtailed production in the fourth quarter. We expect rubber demand in Asia (excluding Japan, China and India) to grow by just 1.1% in 2011, before a reasonable recovery in 2012, with an expansion of 3.1%. Continued demand for cars in developing Asia will support rubber demand growth of 4.1% in 2013. Demand in the EU and US will be constrained by weak economic activity Growth in EU demand for NR is estimated to have slowed to just 2% in 2011, and we forecast that demand will in effect stall in 2012, as the euro zone slips back into recession. Usage will not return to its pre-global recession level during the forecast period, despite an improvement in demand in 2013. There is also a serious risk that escalation of the sovereign debt crisis could severely undermine the euro zone economy. Despite high NR prices, there was an increase in the proportion of EU rubber demand met with NR consumption in 2010, to 33%. If NR prices remain relatively high, however, it is likely that NR's share will fall in 2012-13. Growth in North American demand for rubber slowed in 2011 from the rapid rate seen in 2010, as pent-up demand had largely been fulfilled, but it appears to have held up better than in the euro zone. Car production in October was up by 21% year on year, while vehicle sales were up by almost 9%. But the economic recovery is stuttering. Despite reasonable US GDP growth in the third quarter, the euro zone crisis is weighing on stockmarkets and economic confidence. We still expect North American NR demand to rise by an average of only 1.2% a year in 2012-13.

Natural rubber: consumption

('000 tonnes unless otherwise indicated)
2009 China India 3,384 905 2010 3,646 944 2011 3,792 985 2012 3,953 1,025 2013 4,123 1,069

Japan Other Asiaa EU Other Europe b North Americac Latin America Africa World d % change
a

636 2,045 831 176 790 485 93 9,325 -8.3

750 2,201 1,132 225 1,071 613 101 10,777 15.6

720 2,225 1,154 232 1,092 628 109 11,027 2.3

742 2,295 1,155 236 1,103 642 116 11,347 2.9

755 2,389 1,177 242 1,118 657 124 11,735 3.4

Including Australia. b Including the former Soviet Union. c Canada and the US. d Totals do not add, owing to rounding. Sources: International Rubber Study Group (IRSG); Economist Intelligence Unit.

Download the numbers in Excel Supply Assuming there is no major weather disruption in the leading producer countries, Thailand, Indonesia and Malaysia, we expect an increase in NR production of 5.1% a year on average in 2012-13, up from an estimated 4.8% in 2011. Governments in these leading producer countries are eager to support this growth, given that current prices for NR are historically high (despite recent declines) and that there are robust prospects for future demand growth in emerging Asia. It will take time, however, for investment to pay off: newly planted rubber trees take seven years before they become productive. Some rubber producers may delay the replacement of aged trees in a bid to maximise short-term production and take advantage of high prevailing prices. NR supply growth will eliminate the global shortfall in 2012. However, the International Rubber Consortium, which represents rubber producers in Thailand, Indonesia and Malaysia, has warned that it may intervene if prices fall too steeply amid intensifying concerns over the state of the euro zone and the global economy. Such intervention could involve asking producers to restrict exports. Output growth in Indonesia will be reasonably strong The main impetus behind global NR production growth in recent years has come from Indonesia. Indonesia's NR production grew by 12.1% in 2010, as it was hit less severely than other South-east Asian countries by adverse weather associated with La Nia, a global weather pattern that causes unseasonal weather conditions. However, unseasonable rains did hit Indonesian rubber producers in 2011, although production is still estimated to have grown by 7.1%, and we expect it to expand by an average of 6.7% a year in 2012-13. Production in Thailand has not been affected by the floods Thailand, the world's largest producer of NR, has been hit by severe flooding since October, but rubber plantations are concentrated in the south of the country, away from the flooding in the northern and central provinces. The Association of Natural Rubber Producing Countries reported in early November that the flooding had not had a significant effect on production, which it still expected to have increased in 2011. We estimate output growth of 3% in 2011, and forecast that growth will average 4.6% a year in 2012-13. Good monsoon rains support output in India In India, the world's fourth-largest NR producer, good monsoon rains in rubber-growing areas resulted in production rising by an estimated 4.6% in 2011. We expect growth of 4.9% a year on average in 2012-13. Medium-term prospects for Indian rubber production are promising. According to the Indian Rubber Board, 14,000 ha of rubber

trees, which were planted seven years ago, are now becoming productive. The government is also committed to expansion of the country's rubber-producing capacity. The Indian Rubber Board is investing around Rs1.7bn (US$37.8m) in expanding rubber cultivation during the government's 11th Five-Year Plan (2007-12). By the end of the 12th Plan it hopes to bring an additional 60,000 ha under cultivation. Malaysia's rubber industry continues to suffer from labour shortages After falling by over 20% in 2009, production in Malaysia recovered at a reasonable rate in 2010, but the level of production remains well below that of 2008 owing to a combination of adverse weather and labour shortages (tapping is generally less remunerative than industrial employment, and rubber farming is more labour-intensive than palm oil cultivation). These problems continued to affect production in 2011, although Statistics Malaysia reported strong production growth in January-August. We estimate growth of 7.8% in 2011 and forecast robust rates of annual expansion in 201213. However, the production level will remain well below its previous peak in 2006. China is only the sixth-largest producer of natural rubber in the world, but the rapid growth of domestic consumption is encouraging investment in the sector. We expect production to expand by an average of 4.4% a year in 2012-13. Vietnam's rubber output continues to rise Production in Vietnam is forecast to rise by 3.8% a year in 2012-13. As in many other countries, high prevailing rubber prices are encouraging the planting of more trees (although the seven-year gap between planting and production means that there will be no sudden sharp increase in supply). Government policy is, however, constraining growth. In early 2011 the government issued a request that farmers stop making way for the planting of rubber trees by destroying other crops, such as tea, maize and cassava. The opportunity for profit, combined with competition for land with other crops, has led the Vietnam Rubber Group to invest in rubber plantations across the border in Cambodia. It expects to have cultivated 50,000 ha of rubber plantings in Cambodia by the end of 2011. Production in Cte d'Ivoire could still be affected by labour shortages Rubber production in Cte d'Ivoire has been undermined by the political crisis that engulfed the country in early 2011, and growth in 2012 could still be affected by a shortage of available labour, since many workers fled rubber-producing areas during the post-election violence. However, we expect production to rise by an average of 3.5% a year in 2012-13, assuming that there are no further political eruptions. The mediumterm growth prospects are promising. The government is aiming to renew 300,000 ha of existing plantations and plant another 300,000 ha by 2018. However, government policy could also work against growth in rubber production: a minimum price for cocoa was recently introduced in an effort to reduce the number of farmers who are switching from the production of cocoa to rubber because of its relatively high price.

Natural rubber: production

('000 tonnes unless otherwise indicated)
2009 Thailand Indonesia Malaysia India Vietnam 3,164 2,440 856 820 724 2010 3,252 2,736 939 851 755 2011 3,350 2,930 1,012 890 780 2012 3,513 3,135 1,068 935 810 2013 3,664 3,336 1,132 979 841

China Cte d'Ivoire Brazil Others World a % change

a

644 203 129 722 9,702 -4.2

665 227 132 844 10,401 7.2

690 235 136 875 10,898 4.8

720 243 140 905 11,469 5.2

752 252 144 937 12,037 5.0

Rounded to nearest 10,000 tonnes. Sources: IRSG; Economist Intelligence Unit.

Download the numbers in Excel Stocks and prices Global stocks of NR fell in 2010 as demand outstripped weather-constrained supply, with an estimated global deficit of 376,000 tonnes. The market remained in deficit in 2011, but the shortfall is estimated to have narrowed as the Japanese natural disaster and weak global economy hurt demand growth. In 2012 we expect the market to return to a surplus. Global sufficiency fell to an estimated 7.4 weeks in 2010, and we expect it to fall further, to 6.6 weeks, in 2011, before rising in 2012 and 2013. On the assumption that weather conditions remain benign, improvements in supply in 2013 will contribute to a continued recovery in stocks in that year.

Natural rubber: supply and demand

('000 tonnes unless otherwise indicated)
2009 Supply Demand Balance Stocks b Weeks' consumption
a
a

2010 10,401 10,777 -376 1,526 7.4

2011 10,898 11,027 -129 1,397 6.6

2012 11,469 11,347 122 1,519 7.0

b

2013 12,037 11,735 302 1,821 8.1

9,702 9,325 377 1,902 10.6

Includes International Natural Rubber Organisation (INRO) stockpile disposals after 1999. stocks; year-end. Sources: IRSG; Economist Intelligence Unit.

Global closing

Download the numbers in Excel Natural rubber prices will fall as market balance improves After soaring in the first quarter of 2011 rubber prices were on a declining trend for much of the remainder of the year, but on an annual average basis they will have risen by an estimated 29%, with SMR20 spot prices in Kuala Lumpur averaging M$13,709/tonne. Spot prices fell particularly sharply after the earthquake and tsunami disaster in Japan in Marcha decline that mirrored a more general fall in commodity prices, as investors became more risk averse. Prices have also been under pressure owing to general concerns about the crisis in the euro zone and the poor outlook for the global economy. More recently, prices have been hit by the flooding in Thailand, which has disrupted automotive production, while leaving rubber-producing areas largely unscathed. On November 4th the price stood at M$11,255/tonne, down from M$12,740/tonne a month earlier. The deteriorating economic performance in developed markets, which will weigh on demand, combined with healthy growth in NR production, will continue to constrain prices over the coming years. On an annual average basis, prices will drop by 21% in 2012, before stabilising in 2013. In New York, RSS1 will follow a similar trajectory.

Natural rubber: stocks and prices

2010 Stocks a 1 Qtr 2 Qtr 3 Qtr 4 Qtr % change Prices New Yorkb 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year % change Kuala Lumpurc 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year % change
a

2011

2012

2013

2014

1,781 1,416 1,523 1,526 -19.8

1,350 1,300 1,250 1,397 -8.5

1,400 1,350 1,250 1,519 8.7

1,500 1,550 1,700 1,821 19.9

1,700 -

3,452 3,815 3,605 4,640 3,878 80.7 10,142 9,659 9,657 13,000 10,615 67.0
c

6,021 5,602 5,200 4,500 5,331 37.5 15,607 13,928 13,400 11,900 13,709 29.2

4,400 4,370 4,340 4,340 4,363 -18.2 11,000 10,800 10,700 10,700 10,800 -21.2

4,390 4,380 4,400 4,420 4,398 0.8 10,800 10,850 10,920 11,000 10,893 0.9

4,400 10,980 -

'000 tonnes. b RSS1 spot prices, US$/tonne. Sources: IRSG; Economist Intelligence Unit.

SMR20 spot prices, M$/tonne.

Download the numbers in Excel

The Economist Intelligence Unit Source: World Commodity Forecasts