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Tapping rubber is  a job mostly done by smallholders (Photo: Simon Roughneen, central Sri Lanka. June 2014)
Tapping rubber is a job mostly done by smallholders (Photo: Simon Roughneen, central Sri Lanka. June 2014)

Indonesia’s rubber sector struggles with global drop in prices

JAKARTA – A five year slump in rubber prices has hit Indonesia’s 2 million rubber farmers hard, slashing their incomes almost in half and prompting some to look at switching to other crops.

“A farmer now needs two hectares of rubber to earn just the equivalent of minimum wage,” said Lina Fatayati Syarifa, an economist with the Indonesian Rubber Research Institute.

As the world’s second biggest producer and exporter after Thailand, Indonesia is a major player in the “rubber belt” – the equatorial zone ringing the earth where the climate suits the growth of rubber trees.

While there have not been any major protests or unrest, as yet, due to falling prices, there are concerns that if Indonesia’s rubber growers cannot get a better price for their produce, many may switch to more profitable crops such as palm oil.

“In the current price scenario of continuous fall in prices, small growers across regions are expected to respond to the falling market prices through controlling natural rubber supply, irregular tapping plus accelerated clearing of aging trees and a shift to other crops like oil palm,” Lekshmi Nair of the Singapore-based International Rubber Study Group, told The Edge Review. The IRSG is an inter-governmental organisation that includes 36 rubber-producing countries and 120 industry members.

The world market for palm oil, meanwhile, has more than doubled since 2000, according to the United Nations Food and Agriculture Organization. The World Bank has said that an extra 63,000 square kilometres of palm plantations will be needed to meet global demand by 2020, while Indonesia, the world’s biggest palm oil grower, is aiming to increase palm oil production to 40 million tons a year by 2020 — double the country’s 2009 output. But conservation groups say that expanding oil palm plantations will mean more deforestation in Indonesia. A recent University of Maryland study said that Indonesia lost more rainforest than any other country in 2012.

However, large-scale changeover from rubber to oil palm production has not yet happened, Lina Fatayati Syarifa said. With global stockpiles of rubber likely to be eaten into next year by increased demand – driven by expanding car sales – a large-scale switch to oil palm growing might not be inevitable either, if rubber prices recover in the immediate term.

About 90 per cent of global natural rubber output comes from Asia – mainly Thailand, Indonesia, India, Vietnam and Malaysia. Some 60 per cent of the world’s natural rubber is used to make tyres, with most of the rest allocated to the production of gloves and condoms.

A likely 4 per cent increase in global car sales in 2015 to a record 90.5 million units, according to LMC Automotive Ltd., a British research company, will draw down global stockpiles of rubber. LMC said that Asian sales will expand by more than 5 percent in 2015.

China is the world’s biggest consumer of rubber, buying 2.9 million tons of natural rubber during the first eight months of the year, according to the Association of Natural Rubber Producing Countries – a jump of 6 per cent from the same period in 2013.

That demand, combined with reduced tapping in Thailand and Indonesia, will see the world’s rubber surplus shrink by 46 per cent in 2015, according the IRSG.

Most of the world’s natural rubber is grown by small-hold farmers, perhaps as much as 80 per cent. In Indonesia, small-holders account for 85 per cent of the nearly 3.5 million hectares under plantation across the archipelago.

Most of Indonesia’s rubber is grown on the island of Sumatra, although there has been an increase in planting on Borneo, known as Kalimantan in Indonesian, in recent years.

Indonesia exports between 80 and 90 per cent of its rubber, with half of this sent to other Asian countries, although the United States has been the single biggest export market in recent years.

But statistics from the Indonesian Trade Ministry show unprocessed rubber exports have almost halved in value over the past three years – down from US$11.77 billion in 2011 to US$6.91 billion in 2013, tracking the fall-off in prices.

Indonesia’s rubber producers face other problems besides the price slump. Representatives of the rubber sector, along with producers of other commodities, are angered by a recently passed regulation that slaps a value-added tax of 10 per cent on agricultural products, including palm oil, rubber, cocoa, coffee, tea, cloves and tobacco.

Potential foreign investment in the rubber sector could be undermined by a draft law proposing to limit foreign ownership of plantations to 30 per cent, down from the current 95 per cent, with Malaysia’s rubber glove manufacturing giants considering withdrawing from Indonesia if the measure is passed.

Indonesia’s rubber sector has been undermined by the country’s laggard manufacturing sector, which, coupled with infrastructure improvements elsewhere, has made it more profitable for companies to turn rubber into value-added goods elsewhere. Indonesia’s own glove-making sector has plummeted from more than 40 companies two decades ago to just six now. In 2012, Malaysia held a 63 per cent share of the global rubber gloves market, compared with Indonesia’s 13 per cent.

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