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