Spend Matters welcomes another guest post from Samantha Miles of Mintec.
Rubber, whether synthetic or natural, is a major part of our lives, as it’s the basis of items ranging from tires to surgical gloves to condoms. We can get to the same end product by harvesting natural latex or refining crude oil. However, with a specialized marketplace and high prices for crude oil, it is worth watching Thailand and Malaysia for potential market issues. So this month our eyes turn to Thailand.
Thailand’s rubber farmers have recently been involved in clashes with officials and riot police due to dissatisfaction with the level of financial support being offered by the Thai government. The protests have included blocking roads and railways and violent altercations with the police, who have responded with tear gas. At least 118 police officers have been injured, while the number of injured protesters is still unknown. This civil unrest is a drastic consequence of the significant price drop in rubber prices that has occurred since the peaks in 2011, as the continuing global downturn has limited demand.
Thailand is both the world’s largest rubber producer and exporter, with production in 2013 expected to reach 3.86m tons with exports of 2.8m tons. The rubber industry generates an income of over 600 billion baht (USD18.7billion) per year for the country, with the US and China being the top two export destinations for Thai rubber.
Thai farmers have been protesting over low rubber prices in a bid to get more financial assistance from the government. In August, the Thai government offered a subsidy of 10 billion baht (USD312m) to rubber farmers in an effort to support farmers’ incomes. Although agreed by farmers in the Central, North, and Northeast areas, those in the South and East refused to accept this and protested.
At the start of September, the government offered an improved subsidy of 21.1 billion baht (USD659m), more than double the original offer. This would be paid directly to farmers based on the amount of land they hold. The subsidy works out as 2,520 baht per rai (0.16 hectare) with an additional 10 baht per kg of rubber for each farmer, giving an overall total of approximately 90 baht per kg. Each farmer would be able to claim for a maximum of 25 rai. Although most farmers groups have now agreed in principle to the improved subsidy scheme, some are still holding out for an improved offer. These protesters instead demand a 40 baht per kg additional subsidy from the government, taking the total subsidy up to approximately 120 baht per kg.
A previous intervention from the Thai government in 2012 saw them spend 22 billion baht (USD690m), purchasing 198,000 tons of Thai rubber at above market prices. This led to a build up in stocks, which the government found difficult to sell. By offering a subsidy straight to farmers rather than directly intervening in the market, the Thai government is hoping to avoid the problem of stockpiling. The lack of a growing stockpile should limit the impact on global rubber prices, as no supply will be taken off the market. However, it may enable farmers to accept a lower price for their rubber while still maintaining or even improving their margins. This could therefore lead to a further weakening of prices.
It does look like the most recent protests are working, as despite the fact that the Thai government had originally said that the 21.1 billion baht subsidy scheme was their final offer, they are now looking at additional measures to help rubber farmers. These additional measures are yet to be announced but direct intervention as in 2012 has already been ruled out as an option.
As the protests have continued, Thai rubber prices have risen due to the disruption to distribution and harvesting and delays to shipments. The rubber market has also been influenced by a surprisingly large increase in US new car sales seen in August. Whether the price of rubber will strengthen towards the end of the year will depend on whether the Thai government can resolve the disputes seen throughout the country.