When will the prices bottom out - market cues indicate a longer haul
- 23% imports from Ivory coast in Jan-Mar 2022
- Some producers stopped buying Indo raw materials
- Spread between Indo and Thai raw materials narrowed by close to 50% since Jan 2022
- Lull to last longer than expected
The price pressure has proved to be anything but transient as the spot rubber prices slide back to the 2020 level. While all the rubber-producing nations are in the line of fire and struggling to find a bottom to the prices, it seems the Indonesian market is least insulated from the uncertainties.
With rising recessionary pressure in Europe, while China tried to bolster its economy, the demand remains bearish and is likely to continue. However, to blame the current demand scenario wholly for the crisis in the rubber market would be unfair. The unprecedented events made it hard for some market participants to judge the market leading to some bullish long position bookings creating a glut in the market.
Increased inflow of African raw material leads to glut
In the world of rubber, things rarely move quickly. However, the impact of a series of setbacks on the rubber economy is proving exceedingly fast, especially for Indonesia. While the Indonesian producers were finding it challenging to maintain cash flow amid high raw material prices in the domestic market, there was a surge in the inflow of African raw materials into the region.
The intention was to curtail the cost, which looked like an economical alternative but seemed to have backfired. Indonesia, as a result, is struggling with an oversupply of raw materials while the bearish demand continues to wither buying interest away. According to Helixtap data, Standard Indonesia Rubber (SIR) 20 around 17% since January 2022, while the raw material price dropped by 13%.
While some attributed the glut to huge imports of raw materials from Africa, others believed lower production due to weak demand has led to the current downturn. “Now something changed in the market. Too many imports into Indonesia” said a producer source.
According to Indonesian customs data, of the total rubber imports, around 23% were sourced from the Ivory coast between January-March 2022, which has slowed since then. According to Industry sources, several Indonesian producers are trying to import, which was not the case in the past.
Source: Indonesia customs data & Helixtap
While there was the concern of being “blacklisted by consumers”, some producers opted for the import way owing to the current slowdown in buying and the consistent margin pressure. “If all import, then how to blacklist or penalize,” a market source added.
The most logical reason for the increase in imports is to lower the raw material cost, while Indonesia struggles with low yield rates and higher factory costs. Even though domestic raw material prices have seen a correction over the year, a drop of around 10 cents in the market might translate into a decline of 2 cents in raw material, creating a disbalance in the cost.
According to customs data, the average cost of import of African rubber in Q1 2022 was around US$1154/mt, while the domestic raw material price averaged at US$1694/mt.
Source: Indonesian customs & Helixtap
Ivory coast has been a preferred source for raw material imports since the outbreak of Covid-19 in 2020. The country’s dependence on ivory coast imports has been consistent since then. While the imports from Ivory coast accounted for 43% in 2020, it was slightly lower at 41% in 2021, and as of June 2022, it stands at 23%.
Diminishing interest for indigenous raw materials tough for Indo raw mat producers
Amid the glut situation, some producers have stopped buying raw materials to curtail further losses, this has further pulled the Indonesian raw material prices down. A second producer source added that the demand for indigenous raw materials is decreasing slowly as even some Indonesian producers have stopped buying. "What upsets me is all the talk of "traceability," and "sustainability" from consumers, but the big producers bring in cup lump with impurity.", he added.
All these are bound to impact the pricing. The gap between Indonesian raw materials and Thai raw materials has narrowed. According to Helixtap data, the spread between the Indonesian and Thai raw material prices has narrowed by close to 50% since January 2022.
A Singapore-based source noted that many Indo producers now prefer to see workable raw material prices. "Indo raw material prices now below Thai. So very quickly, the situation has reversed," he added.
According to industry experts, Indonesian raw material prices dropped around IDR 1000 in a day, and the market expects the prices to hit lower. "I think market raw material will drop below IDR 20000/kg", added the first producer source. Indonesian raw material price was in the range of IDR 20,700- IDR 21,000/kg, while Thai raw material was in the range of THB 45-THB 46/kg as of August 24, 2022.
Some producers have completely stopped buying raw materials, an Indonesia-based source noted, adding, "We have never seen it before."
Amid all the overbearing gloom across the market, Indonesian production is significantly impacted. According to market sources, most small to mid-sized producers have lowered their output to 40%, and the big producers are likely to follow suit. Even though most of the forecasts suggest some growth in global rubber production, Indonesia might lose some of its share to other sources.
Changing demand profile
Indonesian rubber has enjoyed a premium over other sources since mid-2017, as it catered to some cash-rich markets like Europe, the US, and Japan. However, it has become a bane for Indonesian rubber as buyers shift to economical alternatives changing the export profile for Indonesia.
With the Russia-Ukraine conflict and the sanctions, many European tire makers took a hit after the drop in demand due to the Covid outbreak. While the European tire makers hunted for economical alternative sources, Indonesian rubber has expanded its reach in Japan.
Source: Helixtap, 2022- Jan – June data
In H1 2022, Indonesian exports into Japan saw a rise of around 8.5%, while most other key markets, like the US and Korea, saw a drop in volume. The market, however, seemed divided on the way forward for Indonesia.
Source: Indonesian customs & Helixtap
On the one hand, with the current cost level and bearish demand cues, Indonesia might remain self-sufficient and cater to a certain market sector. However, this situation might lead Indonesia to lose its market share to other countries like Thailand, Africa, or Vietnam. On the other hand, sourcing raw materials could help cut the cost, but it loses its branding as a premium quality rubber in the market, which would also lead to erosion in demand. “Indonesia export volumes have shrunk by one million tons in last two years,” a trader source noted.
Moreover, market experts have noted some shifts in sourcing locations within the country. While Belawan and Surabaya remain the key ports for the Indonesian rubber trade, some market experts noted that Palembang might also become an important location since more factories and volumes are being produced here. This, however, might further increase the cost of Indonesian rubber as sourcing from Palembang would lead to additional inland transportation costs.
Way ahead might not be easy
As the margins continue to remain red for the Indonesian producers, it is evident the market might have to wait a bit longer to hit bottom. “For the foreseeable future, the market can only go down…..period,” said the second producer source. While there were some corrections in the raw material prices, a consistent lack of demand and oversupply in the market would weigh heavily upon the market sentiments and the producers’ margins.
The market would remain volatile with elevated energy prices, tightening monetary policy, and recession concerns. The pressure is further amplified after a major tire maker to pulled back from their long-term contracts (LTC), adding to the glut situation, which is feeding into renewed jitters amid the buyers.
If the situation persists, only the larger producers would still have a scope to survive. According to industry experts, Indonesia lost 28 factories in 2021, with some factories foreclosed by banks. Therefore, the possible next evolution would be consolidation in the Indonesian market depending on how long the smaller players can sustain.