Rubber Export Industry In Thailand Economics Essay

Rubber export is very significant for Thailand. It is also considered as one of the country’s major industries. For rubber export, it has been contributed a huge part on Thai economic and it has been successful industry with high growth rate for a long time. However, plenty of data sources obviously prove the decline trend of this export recently. So this research has analyzed the rubber industry’s situation by using most Impacts Events during 2006 to 2009 which are key discouraging factors (high rainfall, decreasing in demand-supplies, fluctuated rubber price and too appreciated baht). Moreover, this project would also refer to the competency of Malaysia -the competitors of Thailand in order to comparing and discussing why Thai rubber export is going to lose its market share at this recent period. Finally, for this research mainly implement the correlation analysis into the processing analysis to estimate linear relationship between rubber export and variable factors of the industry also including recommendations in order to develop and modify Thai rubber’s competitiveness in the world market.

INTRODUCTION

The rubber product manufacturing industry is one of the country’s major industries. The word ‘Rubber’ refers to natural rubber which is an important raw material utilized in manufacturing any rubber products and synthetic rubber.

The exported natural rubber was categorized into three groups: ribbed smoked sheets, standard Thai rubber and concentrated latex.

Ribbed Smoked Sheet (RSS) is the most important product, making up 70 percent of the total sales. They are mainly used in automobile tires manufacturing

Standard Thai Rubber (STR) is another type of rubber grade which are packaged in block, they are widely used in American and European market.

Concentrated latex is used as raw material in the industry of rubber gloves, condom, balloon, etc.

Nearly 90 percent of Thailand’s natural rubber production is for export and only 10 percent of all rubber produced in Thailand is used for domestic consumption. Focusing on the type of product, the largest proportion of total rubber product is standard Thai rubber which takes 40 percent of the total. The following is ribbed smoked sheet. The export standard Thai rubber has decreased about 63 percent comparing to the same period in 2008, also ribbed smoked sheet which has decreased 50 percent of growth rate.

The major importers of Thai rubber are China, Malaysia and Japan. These 3 importers import about 65 percent of Thai rubber export value. However, even though Thailand is the world’s largest natural rubber producer and exporter but Thailand tends to lose their market share to mainly Indonesia which expected to continuously growth. Also Malaysia, who has reduced its imports of Thai rubber according the rising of natural rubber producers, is expected to be an exporter.

Figure 1: Thai Rubber Major Importers

In previously year, Thailand which makes up 33 percent of the global natural rubber supply, production fell an annualized 21.6 percent during the first four months of 2009, according to data from the Rubber Research Institute of Thailand. The expected trend of rubber export in next year is to be lightly increased from 2009. However there are several risky factors that Thailand should consider in order to remain the largest rubber exporter of the world market, such as the dramatically changed of weather, demand and supply of natural rubber and stability of rubber prices.

The purpose and objectives of this research are to identify the major problems that Thailand loses its competitiveness to other countries, to study the changes in Thai rubber export industry and figure out the influence factors in both encouraging and discouraging aspect and to find possible ways to keep its advantages. Also this research of Thai rubber export industry is going to let the researchers understand more about this business and its variables. In additions, researchers will be able to apply economics knowledge to analyze the real problem. The result from this research would help people concern more on Thai rubber export’s situation and probably recommend useful suitable ways to confront with recent issue through an incoming problem.

Literature Review

According to the World Rubber Export Statistic, the growth rate in 2009 dramatically decreased from 36.18 to -48.65 comparing between the same period from January to October of 2008 and 2009, which created the lost approximately 2,900 million US dollar. Recent statements (Kasikorn Research Center, 2009; L. Kittipon, 2008; Krungtheb thurakit, 2007) have recognized the slowdown of Thai rubber export’s growth in many different aspects.

Based on the slowdown, an important recent contribution to the article of Thai rubber export has been analysis by Thai Kasikorn Research Center cited in Bangkok Business newspaper (January 12, 2009). They stated that the world production in 2009 has been decreased 4.8% form previously year. They analyzed 3 probably factors causing this situation. Those are first, the change of weather. Because of unfavorable weather including heavy rains, the production of 3 major rubber exporters, Thailand, Indonesia and Malaysia, decreased for 6%. However, in the past 2-3 years, weather is one of important factors of decreasing in natural rubber production. Second is the demand of rubber which has been decreasing for 5.2%. Third, prices of rubber vary to the demand of world market.

However, what seems to have been neglected in Thai Kasikorn Research Center’s statement is the crude oil price crisis. This significance is an undeniable impact on Thai rubber export which has been explored more in earlier article (Lakchai Kittipon cited in Than-Setthakij newspaper on October 2-4, 2008). According to US’s economic crisis has affected indirectly to Thai rubber export, the major importer of Thai rubber for their tires manufactures, China, has reduced the imports from Thailand because of United State reduce the purchase tires from China. In other hands, the crude oil price created the weakness of rubber price. Importers will hold and see when there is lowest price. These can be concluded that rubber export depends on purchasing power in United State and the crude oil price.

Furthermore in Krungtheb thurakit’s article (February 23, 2007), there are other factors that we should take into account which are high cost of production and lacking of government support in expansion of the industry such as technology, capitals (cost of investment) and tax efficiency as well as other criterion in order to help pushing the rubber price to be higher. The government should set up the policy and development plan in order to help giving the confidence to those who working with rubber.

Methodology

On the paper, researchers would analyze the factors affecting Thai rubber export. The variable factors which would be tested in this research are the dramatically changed of weather, demand and supply of natural rubber, stability of rubber prices and tax of rubber export of study, researchers are going to focus on Thai rubber export section which datum would be collected in Thai rubber association, rubber research institute of Thailand, Malaysian Rubber Board, Department of export promotion, national statistical office and world trade organization and also from private sectors, information base on 2006 to 2009.

To determine which factors have impact on the export, researcher would use “Correlation” as a method according to the limited data. Correlation is a measure of linear relationship between two random variables X and Y, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one factor moves, either up or down, the other will move in lockstep, in the same direction. Alternatively, perfect negative correlation will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the factors are said to have no correlation, they are completely independence.

THE CHANGED OF WEATHER

Favorable condition for Rubber plantation

In order to plant rubber tree in Thailand, planting area is the considerable factor as well as the suitable climates for planting. The optimal conditions for the growth of rubber are:

Land area: 200 m. above the sea level, with slope of 12Â°C

Temperature: in average of 24-27Â°C throughout the year (hot and humid).

Humidity: Between 65-90%

Rainfall: average rainfall should not less than 1,350 mm per year and not less than 120 days of rainfall.

Soil: Loamy or sandy soil and soil surface depth not less than 1 m. with pH of 4.0-5.5

Wind: average wind speed not more than 1 m/sec. Deep rich soils with good drainage preferably crumble, well-oxidized and acidic in reaction

This paper would focus on rainfall which is the most influence factor on rubber production. According to statement of the Association of Natural Rubber Producing Countries (ANRPC), changing climatic conditions may affect rubber production across the world.

“Climate change has become an issue of serious concern on the supply potential of natural rubber. Apart from fall in yield, even the rubber growing regions in major producing countries are gradually rendered unsuitable for growing rubber”, says the ANRPC report.

The following graph shows the amount of rainfall comparing to the mean. There were quite heavy rainfall in Thailand and it is mainly above the mean level which indicates that it can cause flooding problem, thus leads to the damage and diseases of agricultural crops including rubber trees. However the trend shows the decrease in rainfall by 2009, this may results in an increase in supply production in next year.

Figure 2: Average Rainfall in Thailand from 2003 – 2009

Rubber output in Thailand, Indonesia and Malaysia will drop more than 6 percent in 2009 after unusually heavy rains caused flooding, an industry group said on Monday, raising the prospect of a price rally to last year’s peak. Tight supplies blamed on bad weather have pushed up cash prices by more than 10 percent in the past month, with benchmark Thai RSS3 grade now hovering around $2.75 a kg — within sight of a 56-year high of $3.25 struck last July. Apart from a fall in yield, even the traditional rubber growing regions in major producing countries are gradually being rendered unsuitable for growing rubber. Output in the three main producers, which account for 70 percent of global output, could slip to 6.45 million tons in 2009, down from the October forecast of 6.62 million and lower than 6.91 million estimated last year, according to the group.

Torrential rain in Thailand’s southern region since early November has caused flooding in several areas, including Hat Yai in Songkhla province, which has been declared a disaster zone. Around 800,000 hectares (2 million acres) of rubber land has been hit by rain and flooding, which has disrupted tapping and hampered transport. Supplies are likely to shrink further early next year during the dry wintering season in Thailand, the world’s largest producer, as trees shed leaves and latex output falls.

Prices of rubber sheet, the raw material for RSS3, have doubled from $1.10 per kg in December 2008, the lowest in nearly seven years, due to steady demand while supply was cut by unfavorable weather in Thailand.

It is pointed out in the report that the fluctuating climatic conditions are a threat to the growth of region-based new clones. Overall supply of natural rubber from the key producer nations reduced to 5.1% during 2009. Major rubber producing nations including India, Indonesia, Thailand, Malaysia, China, Sri Lanka, Vietnam, and Cambodia projected production falls at different levels.

DEMAND AND SUPPLY OF RUBBER

Global demand is now running much further behind supply than we expected. In terms of global sufficiency, stocks are therefore forecast to rise to a level last seen ten years ago. The following figure indicates the world demand for natural rubber is slightly decreasing from previous year.

Figure 3: World Natural Rubber Demand

Natural rubber: World Demand

(‘000 tons unless otherwise indicated)

Â

2006

2007

2008

2009

Demand

9,251

9,789

9,480

9,290

Stocks(b)

2,082

2,233

3,050

3,750

Weeks’ consumption

11.7

11.9

16.7

21.0

Includes International Natural Rubber Organization (INRO) stockpile disposals after 1999. (b)Â Global closing stocks; year-end.

Sources: IRSG; Economist Intelligence Unit.

Following table summarizes the trends in annual production of NR from 2007 to 2009 in Thailand, Indonesia, Malaysia, India, Vietnam, China and Sri Lanka. These seven countries accounted for 93% of the global production of NR in 2008.

Figure 4: World Natural Rubber Production

Total production in the seven countries contracted 5.1% in 2009, as per data available up to September 2009. This is the biggest fall in global supply of NR after 1952. Sources of the output fall in 2009 could be diagnosed by examining the changes in tapped area and average annual yield. The tapped area shrank in 2008 and 2009 and average yield fell in 2009. Total tapped area in the seven producing countries shrank by 366,000 ha from 2007 to 2009. Average yield, aggregated for the seven producing countries, although improved from 1281 kg/ha in 2007 to 1339 kg/ha in 2008, fell to 1283 kg/ha in 2009. A closer picture could be obtained by examining each country separately.

Thailand registered 5.5% fall in production in the 12 months ended 31 August 2009 from 2008 full year. Rubber trees in 64,000 hectare in the country were estimated to be replanted in 2009. However, tapped area expanded in 2009 by 21,000 ha as the area planted before 6 years attained tappable maturity. The average yield, measured in terms of production per hectare of tapped area progressively came down from 1723 kg/ha in 2007 to 1698 kg/ha in 2008 and further to 1586 kg/ha in 2009 due to a host of factors including adverse weather disrupting tapping during the first quarter, prolonged wintering in the second quarter, relatively lower price and the export reduction commitment under the IRCo’s Agreed Export Tonnage Scheme (AETS).

Demand

China

The feat of becoming the globe’s largest producer of shoes and a major exporter of tires by China may largely be attributed to its large pool of cheap labor and particularly to the availability of imports to fill the gap in the production chain. China needs to import rubber raw materials which have been very crucial to ensure the survival of the rubber products industry. China is by far the world’s biggest market for natural rubber, accounting for 26 percent of global usage in 2007. Slackening growth in demand in China has had a major impact on the global balance for natural rubber. We expect the deceleration to continue: growth in natural rubber usage of more than 6 percent in 2007 will be followed by 3.1 percent growth in 2008 and an average of 2.7 percent in 2009-10. Top 5 major natural rubber exporters to China are Thailand, Malaysia, Indonesia, Vietnam and India.

China market, the largest market of all Thai rubber export product which takes 35% of market. In 2009 starting from January to November, China imported rubber from Thailand valued $1.2 billion which decreased by 31.85% from $1.8 billion in same period of 2008.

According to the AFET report, China sees slower rubber demand growth, helps farmers. It stated that the world’s largest rubber consumer expects demand to grow at a slower pace of 7.3 percent in 2009 and is poised to help its farmers weather turmoil in the auto sector, industry officials said on Wednesday. Physical rubber prices have more than halved from July’s peak, with benchmark Thai rubber now hovering around $1.45 a kg, as a worsening global recession cuts demand for the commodity. Zhu Xiuyan, chairman of the China Natural Rubber Association, said on the sidelines of a conference. “If the economy does not show marked recovery, we can’t expect a rally in rubber prices.”

China’s State Reserve Bureau has started buying rubber from domestic farms, with planned a purchase of 50,000 tons by mid-April, as the government hopes to lift prices and protect farmers. The amount was in line with a plan announced by the Chinese government earlier this year to purchase 65,000 tons for state reserves for the month of April to stabilize prices and protect the farmers. China, which imports about half of what it consumes, is forecast to use 5.9 million tons of rubber in 2009, up 7.3 percent from 2008, when demand rose 8.9 percent, said Fan Rende, president of the China Rubber Industry Association.

Malaysia

Natural rubber is one of the major commodity exports of Malaysia. Although the share of natural rubber in the total exports has been declining in recent years, its contribution to Malaysia’s foreign exchange earnings is still substantial.

Figure 5: Malaysia Rubber Production

The above graph show that Malaysia has been increase their rubber production slightly even though in last two year, 2007 and 2008, the production decrease but because of Malaysia has been affect by unseasonal heavy rain and also crude oil price. But the trend of Malaysia production is expected to continuously growth. In order to increasing production, recently Malaysia has been decrease amount of natural rubber from Thailand.

Supply

Focusing on the type of product, the largest proportion of total rubber product is STR, Standard Thai Rubber, which takes 40% of the total. The export standard Thai rubber 409,670 tons in 2009 which has decreased by 63.43% comparing to the same period in 2008. The followings are ribbed smoked sheet which also has decreased by 49.85% of growth rate from 2008.

Figure 6: Thai Rubber Exports by Types of Rubber

*RSS: Ribbed Smoked Sheet, STR: Standard Thai Rubber, Conc. Latex: Concentrated Latex

Currently, even though Thailand is the world’s largest natural rubber producer and exporter but Thailand tends to lose their market share to mainly Indonesia which expected to continuously growth. Also Malaysia, who has reduced its imports of Thai rubber according the rising of natural rubber producers, is expected to be an exporter. The following table shows the production of natural rubber of five countries which account for 93% of global natural rubber supply from 2005 to 2007.

Figure 7: Production of Five Major Rubber Producers

THE STABILITY OF RUBBER PRICE

One of the exports risk is fluctuation of price which should be avoided. Price fluctuations are normal for any commodity and rubber is a volatile commodity. Major rubber growing countries like Thailand have sophisticated financial instruments providing price fluctuation insurance to farmers.

Rubber Price in Thailand

Certainly, the demand of the market for rubber and global production output are core factors. The price of rubber is also linked to the fluctuating price of oil which is a major factor in the production of synthetic rubber. When oil prices are high, the production costs and price of synthetic rubber will also increase, which leads countries to switch to use more natural rubber.Â However, if the natural rubber price rises too high for the various industrial producers, they will return to using more synthetic rubber which will lead to a downward adjustment of the price of natural rubber.

Thailand is the world’s biggest rubber producer. However, prices are also set by a number of hidden hands.Â The rubber market in Thailand is controlled by Singaporean and Malaysian investors, and also by Thai investors.Â The Thai government has never developed Thailand’s role in influencing prices of the global rubber markets. The government administers and controls the rubber price bending to pressure from foreign countries and international agencies.Â The government regularly uses a domestic interventionist approach to keep prices stable as a means to gain votes from the rubber farmers.Â

Â Furthermore, the government passed a law to control the rubber price, limit the areas where rubber could be grown, and place controls on the varieties grown.Â Farmers were not allowed to develop the production of rubber themselves.Â These controls were put in place to enable Thai rubber to be competitive in the world market.Â However, structural problems mentioned above led to the monopolization of the market by investors who control the production and marketing of rubber, while the farmers became orderlies supplying rubber to the internal and external markets

Trade Price

Figure 8: Price of Rubber TSR20 in Bangkok

Source: The Association of Natural Rubber Producing Countries, Kuala Lumpur

Figure 9: Price of Rubber RSS3 in Bangkok

Source: The Association of Natural Rubber Producing Countries, Kuala Lumpur

From both tables, it can be observed that Prices during 2009 (January – September) in all the markets ruled considerably below the corresponding rates in 2008 (January – September), the gap between prices in 2009 and 2008 has narrowed down towards the end.

Local price

Figure 10: Rubber Prices of Thai Market

*RSS: Ribbed Smoked Sheet, STR: Standard Thai Rubber, Conc. Latex: Concentrated Latex

The prices of rubber that considered as good price are around 80-100 Baht/Kg. From the information, rubber has best price in year 2008, follow by 2007. 2008, ribbed smoked sheet rubber were sold as higher price which is 83 Baht/Kg. In the year 2009, rubber prices have failed down to around 40-50 Baht/Kg.

FOREIGN EXCHANGE RATES

The exchange rate is the price of one currency expressed in terms of another, and is crucial to exporters. When the exchange rate rises, goods priced become more expensive in foreign currency so demand for these dearer exports drops, reducing overall demand, which should lower inflationary pressure. A rising exchange rate tends to help to curb inflation, potentially allowing for lower interest rates. Conversely, a lower exchange rate, as at present, typically boosts export demand, putting upward pressure on inflation and interest rates.

A fall of exchange rate in the export country will make products more costly for importers. Yet a rise in the exchange rate makes imports cheaper, putting downward pressure on inflation and interest rates.

Figure 11: Foreign Exchange Rate Thai Baht against US Dollar

The above graph show the slightly appreciating of Thai baht against US$ from 2006 to December 2009. Thai Baht has been continuously appreciated from 2006 until now. The factors that affect Thailand’s exports, the exchange rate has the largest effect on competitiveness.

Too appreciated baht over the previous years has made Thai products more expensive for importer (excluding flow-through of goods that must be first imported into Thailand). Our exchange rate relative to our competitors therefore plays a very large role in our international competitiveness.

ANALYSIS

The analytical part will briefly explain the comparison of relationship between Thai rubber exports with four factors; rainfall, demand and supply, rubber price and foreign exchange rate. It shows the factors’ trend from 2006 to 2009.

Figure 12: Comparison of Relationship between Rubber Export and Rainfall

This shows the relationship trend between rubber export and rainfall. As in the graph, rainfall slightly decreases in 2006, then increases in 2007 and for 2009 rainfall decreases by 9% from 2008. Meanwhile export trend from 2006 to 2008 slowly falls and strongly falls over in 2009. It seems like the rubber export may have little affected by amount of rainfall as we’ve seen from the graph in the year 2008 to 2009, when rainfall goes below the optimal amount that it should be, also the rubber export decreases in amount.

Figure 13: Comparison of Relationship between Rubber Export and Demand and Supply

Figure shows the relationship between rubber export and demand and supply from 2006 to 2009. Focusing on Thai supply curve and Thai rubber export, both curves are along which 2006 to 2008 mainly stable but deeply decrease in 2009. For the movement of the world demand curve comparing to Thai rubber export, these are very similar. The trends are increasing, but all fall down in 2009 means that while the world demand is decreasing, Thai rubber export is decreasing too. These can be cited that the two factors, demand and supply, may have affect on rubber export since their trends are along.

Figure 14: Comparison of Relationship between Rubber Export and Rubber Price

Rubber Export

–

Exchange Rate

0.338500539

The correlation coefficient of 0.34 which closed to zero, refers there is no linear relationship between the variables. Both rubber export and exchange rate may not have any relationship, both are independence.

CONCLUSION

According to the research, Thai rubber export is continuously being decreasing and we have been focused on the investigation of the four factors affecting Thai rubber export which are the changes of weather condition, rubber demand and supply, rubber price and foreign exchange rate. After we have collected data from various sources, we then analyze it with the method of correlation and the result indicates that there are some of the factors that we had researched may be not much effect on rubber export, but some are highly effect on rubber export.

In correlation test on rubber export and rainfall the result shows that amount of rainfall could have possible effect to the rubber export; if rubber export increases, rainfall will also increases. However it is important that we have to concern on the optimal temperature for rubber. From the research, we found that there was heavy rainfall which went above optimum temperature, thus leads to the decrease in rubber production.

The result of correlation in demand was 41%, means that there were not much affect to the rubber export. For the result in correlation of rubber supply and rubber export, it is obviously see that these two things may not be affected on each other. Although rubber supplies are high, rubber export may still be decreasing, this may relate to other factors rather than rubber supply.

On rubber price correlation test, the result was 88% which indicates that rubber price is highly effect on rubber export. According to the research data, heavy rainfall cause rubber price to be decreases due to the host factor and the decrease in supply. Therefore when there is good quality of rubber productions, the price may be high, but people can afford to buy due to the good and efficiency rubber production.

As you have seen on the result, exchange rate may not have much effect on rubber export although the data shows the relationship of these two.

As a result some of the factors that we had analyzed were not much affect to the decrease in rubber export. However the main factors that could cause the decrease in rubber export could be occurred by the world economic crises as well as an increase crude oil price.

Finally, in order to develop Thai rubber export to be compete with the competitor, it is very important that we need to develop good quality manure to use instead of chemical fertilize in order to reduce inputs cost, to improve technology development for the rubber industry so it is more or as effective as such development in peer or rival countries. Government policy should be clear and continual improve regulations in order to serve the international rubber business, and help them to find new opportunities, and also work to establish an international price according to the world price.

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