USD 2.00 per kg?

 The Secretariat of the International Rubber Study Group (IRSG) prepares current estimates and forecasts future trends, and techno-economic studies on specific aspects of the industry. In this connection the Secretariat prepares short-term, medium-term and long-term forecasts of rubber demand and supply. This can obviously only be done properly if forecasts of prices are included, as they are one of the determining factors explaining demand and supply. In recent years close cooperation has existed between the IRSG and the Economic and Social Institute (ESI) in Amsterdam, the former employer of the current Secretary General of the IRSG. The model developed at the ESI is now being utilized and enhanced at the IRSG secretariat.

Total rubber consumption

 The model provides a detailed set of projections for rubber consumption covering the whole world as shown in Figure 1. It is important to notice the kink in the line for total rubber consumption in 2000, which can be attributed to the strong growth of rubber consumption in China: the world rubber economy has entered a new era.

Figure 1 : World rubber consumption
Supply potential of natural rubber

 Looking at the supply side for NR, the model uses the concept of normal production, which incorporates all effects of size, composition and quality of the NR area, but excludes the effect f prices. Production will be above normal production if prices are high and vice versa, The effect of the high prices in 2003 and 2004 is reflected in the data points lying above the trend. The conclusion emerging from the detailed country studies is that normal production will continue to increase, but not at the same rate as in the past

Figure 2: Natural rubber production World
A comparison of growth rates between demand pressure an supply potential

 Growth rates for the two series discussed above can be found in Figure 3. During the early part of the 1990s normal production grew more than total rubber consumption leading to low prices and some substitution towards NR. Prices recovered when total consumption grew faster in the mid-1990s. Then came the Asian crisis: normal production of course was not affected as this is determined by the availability and quality of trees. However, actual production grew and prices declined because of the substantial drop in the exchange rates of Thailand, Indonesia, Malaysia and others. Growth in total rubber consumption was strong in 2000 and growth in NR production capacity (normal production) was slightly below 2% . However, large stocks kept prices from increasing. The reverse was true in 2001 as far as consumption is concerned and prices remained low.

Figure 3 : Growth Rates
Earlier price predictions for natural rubber?

 In October 2001 we predicted that growth rates of rubber consumption would outpace NR production growth and that NR prices would reach US$1.00 per kg in 2002. Because of the threat of war in Iraq and problems on stock markets the US$1.00 barrier was only reached in early 2003. Our projections were also that prices would in crease to US$1.40 in 2004. The upward revision of the Malaysian production figures by about 300,000 tonnes per annum during 2004 led to somewhat lower price forecasts. In addition, production in Malaysia increased by another 180,000 tonnes in 2004 to 1,168,700 meaning the market was not as tight as it would have been otherwise. The price we use as the central price in the analysis, TSR20 in Singapore in US$, was1.20 per kg on average in 2004.

Will there be enough nature rubber?

 Figure 3 presented a comparison of the growth rates of normal production and of total rubber consumption. The growth rate of actual NR production can be slightly higher than that of normal NR production if NR prices are high. The balance has to be taken care of by substitution. Prices (and technology) determine the share of NR in total rubber consumption, The same story can be told using Figure 4, again showing normal production of NR up to 2020 as well as how much NR would be required if the 2004 NR share of 41% would be maintained. Again, actual NR production can be somewhat higher, say 10-15%. The  balance again has to be provided by substitution and, in the longer term, by in creased NR production capacity.

Figure 4: the ‘gap’
Projections of NR prices : the US2.00 mark

 Developments in the world market prices, as we now foresee it, can be summarized as follows. The price of SR used in the analysis, is the export unit value of SBR, ex USA. US SBR contract prices confirm it to be a reliable indicator. The SBR price depends on oil prices, demand developments and, to a very small extent, the price of NR. It is forecast to in crease to well over US$2.00 per kg by 2020. On the basis of current information, we forecast that NR prices will be up from the 2004 level in 2005 and 2006, in creasing by about 25 to 30 cents per kg per year. They are expected to reach US2.00 per kg in 2007/2008. Prices are likely to increase further in the years thereafter. The market has become very tight and will continue to be so, especially due to insufficient supply of NR. Even in July 2005 RSS3 prices in Thailand reached levels of around US1/85 per kg. Of course this was an exceptional case, but it reflects the tightness of the market.
 
Additional NR supply

 These high prices will lead to additional planting resulting in higher production capacity. But that will not materialize until 2010. When prices reach such a high level additional substitution is induced, thus some what reducing the share of NR in total rubber consumption. Natural rubber production may go up to over 11 million tones by 2020 if major efforts regarding replanting and new planting are undertaken.