Rubber exports bounce past La Nina

Rubber exports bounce past La Nina

By Sylvia Gratia M.N.

JAKARTA (JP): Indonesia's rubber exports will increase by at
least five percent to 1.61 million metric tons this year from
1.53 million tons in 1998, according to Indonesian Rubber
Association (Gapkindo) estimates.

But the association anticipates earning less foreign exchange
from the exports, with prices forecast to drop in the coming
months.

The association's executive director, A.F.S Budiman, said that
production would remain high this year, even though rainfall was
expected to be higher than last year.

He said the surge in prices of basic commodities would force
smallholder farmers, which produce 40 percent of the country's
rubber output, to increase production to enable them to meet
their basic needs.

"We are confident that we can increase our rubber production
despite the arrival of the La Nina weather phenomenon," he told
The Jakarta Post.

La Nina, which means "little sister" in Spanish, is caused by
unusually cool temperatures in the Pacific Ocean which often
follows the drought-inducing El Nino weather pattern. Its arrival
heralds higher rainfall and violent tropical storms.

Despite the forecast increase in production, he predicted that
rubber export revenue would drop slightly this year from US$1.4
billion recorded last year due to falling international prices.

"Weakening prices will continue to drive down revenue raised
through Indonesia's rubber exports this year," Budiman said
without revealing the association's forecasts for foreign
exchange earnings from rubber exports in 1999.

Rubber prices have slipped to a 30-year low of around 60 U.S.
cents a kilogram since the Asian financial crisis began in the
middle of 1997.

The Indonesian Rubber Foundation (Yakindo) said that the value
of rubber exports was expected to have dropped by over 20 percent
last year to $1.44 billion from $1.83 billion in 1997.

Yakindo's chairman Harry Tanugraha said that the slump in
prices was due to sluggish world demand for rubber products and
the low price of crude oil which made synthetic rubber products
cheaper.

"The increase in rubber production has exceeded the capacity
of rubber processing industries. The processing industries can no
longer absorb all the rubber produced," Harry said.

He also attributed the lower demand to the increased use of
recycled rubber in the United States, Europe, China and India.

Unlike Harry, Budiman attributed the price drop to a decline
in demand resulting from weak Korean, Japanese and Chinese
economies and a labor strike in the U.S.-based General Motors
assembly plant which ended in August last year.

The summer season in several country's also lowered demand,
while several tire factories stocked up on tires between January
and March last year on fears of unrest in Indonesia.

At the same time as demand fell, supplies from Thailand and
Indonesia increased dramatically, spurred on by the sharp drop in
the two countries' currencies against the U.S. dollar which
encouraged producers to export in large quantities.

"Areas such as South Sumatra and Kalimantan increased
production, while prices crept ever downwards," Budiman said.

Farmers were tapping rubber trees between three to four times
a day compared to the normal rate of twice a day as the rushed to
take advantage of the fall in the local currency against the U.S.
dollar.

Many traders and observers have predicted that La Nia will
cause a drop in the country's rubber production in 1999 because
heavy rains will prevent farmers from tapping rubber sap.

But Budiman disagreed and said that the soaring price of
commodities would force farmers to step up their activities to
make ends meet.

He acknowledged that rubber farmers had enjoyed windfall
profits from price increases resulting from the weakening of the
rupiah against the U.S. dollar.

However, the boom days have been brought to an end since the
rupiah strengthened and the prices of basic needs began to rise
in adjustment to the recent monetary trauma which has bled the
country.

A stronger rupiah will also threaten the competitiveness of
Indonesian rubber on the international market during a time of
falling demand, he said.

Indonesian rubber exports peaked in value at $2.74 billion in
1996. The country exports most of its rubber and rubber products
to the United States, Japan and China.

The London-based International Rubber Study Group said in
London that world natural rubber production would outstrip demand
in 1999 for the second year running, partially as the result of
record production in Thailand, Indonesia and India.

Figures released by the study group forecast that global
natural rubber output will rise to 6.8 million metric tons in
1999, from 6.61 million tons in 1998 and 6.42 million tons in
1997. Seventy percent of all rubber produced goes to tire
manufacturing, AP quoted the report as saying.

World consumption is forecast to be 6.70 million tons in 1999,
compared to 6.56 million tons in 1998 and 6.48 million tons in
1997, the agency said.

The Group's individual natural rubber production forecasts for
1998 were (in thousands of tons) Thailand 2,123, Indonesia,
1,576, Malaysia, 900, and India, 609. Estimated 1997 output (also
in thousands of tons) was Thailand, 2,031, Indonesia 1,505,
Malaysia, 971, and India, 580.

INRO

Gapkindo's chairman Daud Husni Bastari said that local rubber
producers would prefer the government to maintain its membership
of INRO because he believes the group is still needed to keep
global prices stable.

Daud said that withdrawing from INRO, which is an
international cartel of producers and consumers, would lead to
the group's collapse and would in turn affect the global rubber
market.

"We consider INRO to be a good institution...it is still
needed to stabilize international prices. For Indonesia, the
agency is still needed to help facilitate the country's rubber
exports," told the Post.

He said that without INRO, the country's position would weaken
in the global rubber market.

Budiman said that INRO had intervened in the rubber market
several times over the last few months, adding that the reaction
from the market was far from satisfactory.

Many traders contend that INRO's intervention was merely to
pacify Malaysia and Thailand, which had threatened to leave the
organization because of its inability to push up rubber prices.

The group, set up 16 years ago to ensure price stability and
contain price fluctuations, has the mandate to buy rubber from
the open market to boost prices and sell from its buffer stocks
when prices rise.

Payments to INRO are based on the size of a country's output
and for consumers, on the quantity of imports.

But the level at which it is authorized to intervene in the
rubber market has been too low to push up prices during Asia's
year-long financial crisis, so that even after intervening in the
market in August, prices remained unaffected.

Malaysia, Thailand and Indonesia were angered by INRO's
inability to raise prices and charged that the organization was
more inclined to protect consumers than the rubber producing
nations.

Malaysia withdrew its membership of the organization on Oct.
15 and Thailand is currently considering following suit.

Thailand, Malaysia and Indonesia are the world's largest
natural rubber producers. Without these three countries, INRO
would lose its ability control rubber prices in the international
market.

A Gapkindo executive who asked for anonymity said that
Indonesia could pull out of INRO if Thailand decided to leave the
organization.

If Thailand left INRO, Indonesia would have no choice but to
follow suit because the absence of Malaysia and Thailand render
the agency ineffective, he said.

"I think, from the funding side, Indonesia would be unable to
afford to cover the agency's operations without the help of
Malaysia and Thailand," he said.

Daud said that Indonesia wanted Thailand to stay in INRO, but
admitted that it could do nothing to stop the Thai government if
it was intent on leaving the organization.

INRO groups six rubber-producing countries and 17 rubber
consuming countries. The producing countries are Thailand,
Malaysia, the Ivory Coast, Nigeria and Sri Lanka.

Rubber importers who hold membership are the United States,
Japan, China, Germany, France, Austria, Belgium, Luxembourg,
Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Spain,
Sweden and Britain.

The group's operations are based on the UN-brokered
International Natural Rubber Agreement, which entered its third
cycle in 1980 and which expires in February 2001.

Table: Indonesian rubber exports, 1992-1997

(Year; Volume (tons); Value (million US$)):
(1992; 1,331,059; 1,172),
(1993; 1,281,968; 1,108),
(1994; 1,319,953; 1,435),
(1995; 1,436,794; 2,234),
(1996; 1,582,473; 2,274),
(1997; 1,569,938; 1,832),
(1998*; 1,530,000; 1,400)

* Estimate

Sources: Central Bureau of Statistics and Gapkindo