Analysis: Can NR move from current surplus to future shortage?

Natural rubber expert and editor of The Rubber Economist, Prachaya Jumpasut looks into supply of NR in the long-term as urbanisation and development in rubber-producing countries impact opportunity costs. Article originally published in the September issue of The Rubber Economist:

The sharp increase in the NR acreage has no doubt contributed to the increase in global rubber production, surplus and stocks over recent years.

With increasing production capacity, how can a long-term rubber shortage ever be possible?

Briefly, on the demand side, as income and population both continue to grow in Asia, more tire and general rubber products will be consumed, giving opportunities for end use industries to expand.

The rapid growth in Asia is more than balancing out the saturation effect on rubber consumption in North America and Europe, resulting in a continued growth in world rubber demand.

On the supply side, increasing opportunity costs in major producing countries will influence a decline in NR supply.

Even rubber prices will likely return to $6/kg as in early 2011, and/or rubber acreage will continue to expand like what happened over the past 10 years. Despite prospects for a continued increase in output from new and smaller producing countries, there is no guarantee that there will be sufficient NR in coming years.

The decision to plant or to tap rubber trees depends not only on current prices, but also on alternative incomes and alternative costs.  The land, capital and labour that go into producing rubber means the opportunities to build a factory or industrial complex are lost.

In the early stages of economic development, in a rubber producing country, the opportunity cost of rubber production is quite low.  There are few opportunities apart from producing rubber and other commodities and wages in the city are not high enough to attract tappers away from the plantations.

As the country becomes increasingly-industrialised, wages in the city increase, attracting workers and making land and capital relatively expensive to produce rubber.

It is inevitable that all producing countries, at one time or another, will reach the point at which the opportunity cost will be higher to continue to produce rubber. This time will come sooner or later.

NR is unique because many major producing countries are amongst the world’s fastest growing economies.   That is why Malaysia rubber output declined from 1.7 million tonnes in the late 1980s to just over 700,000 tonnes last year. Soon Thailand, Indonesia and Vietnam will follow the same path.

So as demand continues to increase while supply declines, the NR industry may eventually face shortages.

This may likely lead to increases in the use of alternative materials such as synthetic rubber (SR), guayule, and dandelions. There has been news of developments of NR from the latter two materials and trials being carried out by a number of tire manufacturers.

However, to us it is not certain whether these materials can be a viable source for NR.

The most important question is whether dandelions or guayule can be produced on a large scale and as cheap as rubber?  Many people believe that this is unlikely.