Situation Report: The looming crisis of natural rubber. The Chief Executive’s view:
By Robert Meyer, Chief Executive Officer, Halcyon Agri Corporation Limited
Natural rubber is everywhere. It is a critical part of the mobility and transport, health, industrial and consumer sectors worldwide. It is an irreplaceable part of many of these industries – particularly the mobility and transport sector. For all the evolutions and innovations in automotive and aviation manufacturing over the last decade, there has been no replacement for the role of natural rubber in those sectors. We are far closer to replacing the driver in a car than the natural rubber in its tyres.
Those industries, and increasing global urbanisation, fuel a demand for natural rubber that continues to grow worldwide. Since 2010, global consumption has risen from 10 million tonnes to 14 million tonnes today. We are using more and more rubber, while its supply becomes less and less sustainable. Simply put, natural rubber is an industry headed for crisis – one that will have a huge ripple effect across all of the industries and sectors it supplies.
How can we fix the infrastructure issues?
For a resource as critical as natural rubber, its supply and mechanics remain remarkably unchanged since the formation in South-East Asia in the 1950s of the industry as we know it. While the demand for natural rubber comes from some of the largest sectors and companies in the world, the vast majority of its supply comes from smallholder-based production across Asia and Africa. 92% of global rubber originates from subsistence farmers with less than 2 hectares of land.
Similarly, rubber’s pricing is still based on a futures market that while workable in principle, has become increasingly disconnected from the demands of contemporary rubber consumers, and increasingly less effective as a price discovery tool.
This is due to a number of factors; the inconsistencies that drive pricing on the global futures market, the inefficiencies of how producers react to the market price signals the futures market dictates, and the complexities of natural rubber production.
As it stands futures pricing is largely dictated by futures contract parameters that stand at odds with the specifications of rubber demanded by consumers. Most consumers, in fact, state in their contracts that they will not accept rubber of the parameters the futures market outlines. Furthermore, the global futures market is dominated in volume – by a factor of as high as 100:1 – by Chinese grade WF rubber that has no application in tyre-making, yet drives pricing for high quality natural rubber.
This has led to huge price volatility in the price of natural rubber. Since 2000, when natural rubber prices hit an all-time low of circa 500USD/mt, we have seen them hit an all-time high of circa 6000USD/mt in 2011, before hitting a recent low in 2016 at 1000USD/ mt.
This price volatility has a massive impact on how producers act. Effectively, the supply side of natural rubber is reliant on an uncoordinated network of millions of individual smallholders reacting to pricing signals. At high prices, planters plant. It takes six to seven years to first yield, by which time prices are likely to have fallen – and historically, they have. At that point, the most prudent approach would be to scale back supply – which a subsistence farmer cannot do. Their income is price x volume, and low prices tend to be made up with higher volumes.
The very pricing mechanism meant to provide certainty to the volume farmers produce is in fact misleading them. Worse, it is creating huge social and environmental issues – excessive deforestation during high-prices, and financial despair for farmers when prices are low.
Between 2008 and 2013 an area roughly equivalent to the size of Belgium has been deforested and subsequently planted with rubber. On the social front, 6 million rubber farmers are facing financial distress.
This is not an issue unique to natural rubber. Coffee and cocoa farmers – to name but two – are suffering the same. Never has demand for mobility, coffee or chocolate been higher, and never have the farmers producing these crops been more destitute.
Can we build a new roadmap for rubber?
This leads us to the crux of the problem with natural rubber production – one that desperately needs solving. As it operates now, it appears the industry is heading down one of two deeply unenviable roads; the continuation and worsening of current issues like the short-changing of subsistence farmers and ongoing deforestation, or that these farmers – some of whom earn less than 50% of their national minimum wage – stop producing altogether.
If they were forced to abandon production en masse, we would be facing an unprecedented global mobility crisis. The world would come to a halt.
It is these issues that have been rightly highlighted by the NGOs and civil societies investigating the natural rubber industry. Again, we welcome their scrutiny. Sunlight is the best disinfectant, and these issues need attention.
But it is critical that we look holistically at the market – at the reasons causing these issues, and not just the issues themselves. They are a consequence of a disjointed market powered by millions of individuals rather than a single, coherent sustainable system.
We need greater transparency, greater investment and significant disruption to the status quo to solve these issues. We cannot put the burden of transparency and traceability of high-grade natural rubber on the farmers – we, as an industry and all of those involved in the natural rubber supply chain, need to come together to address the crisis we are facing.
As it stands, the natural rubber industry is running out of road. The impact of a production collapse would be immeasurable to both industry and society worldwide – and yet it is a conversation no-one is having. A crash no-one is anticipating. That needs to change – and we encourage and invite the questions this industry needs to answer.
Chief Executive Officer – Halcyon Agri Corporation Limited