economics

March 16, 2010

Bad News For Tire Makers

Filed under: Uncategorized — ktetaichinh @ 12:03 am
Tags: ,

The OPEC of rubber? There is such a thing, and it is about to get some teeth.

The International Rubber Consortium, a cartel of the world’s three largest natural-rubber exporters—Thailand, Indonesia and Malaysia—has asked Vietnam to join the club. IRCo already produces 75% of the world’s natural rubber, but without Vietnam’s rubber plantations, the group lacks clout.

This became evident as rubber prices plunged to a five-year low in 2008. IRCo’s response—to reduce exports by 700,000 metric tons—was undercut by Vietnam’s producers, which actually boosted output last year.

[VIETHERD]

This year, Vietnam is expected to produce nearly 770,000 tons of natural rubber, a 39% increase in just four years. Soon, it may surpass India, where most output is locally consumed, and Malaysia, where production is falling as farmers switch to more-lucrative palm-oil production, to become the No. 3 producer.

Hence, the invitation from IRCo. Better coordination with Vietnam to turn the rubber tap off means cheap natural rubber may become a thing of the past. For example, Thailand, still the world’s largest rubber producer, “favors” rubber prices above $2.60 per kilogram. Having doubled in the past eight months, prices already sit well above that, but any retreat will surely be met with more production cuts. With Vietnam on board, IRCo will control 84% of the world’s natural-rubber output.

To be sure, obstacles to IRCo’s ambitions, such as convincing small growers to fall in line, linger. But controlling rubber supply is easier in Vietnam, where 60% of output is directed by state-run companies and one company alone controls nearly half. In Indonesia, Malaysia and Thailand, most of the rubber output is from small growers.

Vietnam, given a choice between accepting restrictions on its expansion plans and gaining greater control over prices, is leaning toward the latter. It has agreed “in principle” to join the group.

Tire makers, which consume 70% of the world’s natural-rubber output, need to watch out.

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