Rubber barons' gamble

Rubber producers accelerate plans to cut output, raising tyre prices by 20%
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The Independent Online

Indonesia, Thailand and Russia have fired early shots in a trade war that is threatening to engulf the world rubber market.

In a bid to reverse a slump that has taken natural rubber prices down to 30-year lows, Indonesia and Thailand, the world's biggest producers, have taken a huge gamble. These two, which control half the world's natural rubber market, are believed to be planning an immediate 10 per cent cut in production in the hope that the squeeze on supply will force prices to rise by 30 per cent.

The scheme represents a sharp acceleration of previous plans, which had involved more moderate cuts being made over the space of five years. Commodities analysts are expecting the world's third biggest producer, Malaysia, to follow suit over the next few weeks.

The cuts, if effective, could produce an estimated 20 per cent hike in the price of finished tyres.

In order to achieve the dramatic cuts, the Indonesian and Thai governments are proposingto convert the plantations into areas for cultivating cash crops such as cocoa and coffee.

Their desperation is a result of two factors affecting global demand for rubber. The first is the gradual decline of the auto market, which accounts for the bulk of usage in tyres and seals. The second is the low oil price, which has made synthetic rubber a cheaper alternative for consumers.

One of the principal beneficiaries is Russia, whose large synthetic rubber producers have turned a healthy profit by using cheap domestic oil supplies. Russia is believed to have no intention of pulling back crude production, despite calls from leading players in the world oil market. Russian rubber producers are further understood to have approached China with a cheap synthetic alternative to its proposed purchase this year of one million tonnes of natural rubber.

But the natural rubber producers have a scientific trump card arising from the formulae used by large tyre producers such as Goodyear and Bridgestone. Because tyres are generally made from a mixture of natural and synthetic rubber, the natural producers know that demand will never fall beyond a certain point.