Is rubber economy of Indonesia shrinking? H1 2022 exports down 9.5%

Natural rubber (NR) exports from Indonesia contracted by 9.5% during the first half of this year (Jan-Jun 2022) compared with the same period in the year before. The world’s second largest NR producing country, contributing 21% of the global supply, exported only 1.135 million tonnes of NR in the first half of 2022.?Please see the following table.?

The 9.5% contraction in the quantity of Indonesia’s exports during the first half of this year was largely contributed by the considerable falls in the shipments to the U.S. (Down 5.1% year-over-year), China (Down 17.7% y/y), India (Down 44.2% y/y) and South Korea (Down 43.8% y/y). However, the shipments to Japan during the period rose by 8.5% y/y making the country the largest trade partner of Indonesia in NR exports. Please see the table below:

Indonesia used to be the preferred source of NR for many auto-tire companies world over largely attracted by its cost advantage over its counterparts in other southeast Asian countries. However, Indonesian NR has lost its cost advantage over the past few years largely due to the poor yield of latex from its rubber holdings caused by the following factors:

1. The average yield from rubber trees in Indonesia has been considerably impacted by the outbreak of the Pestalotiopsis fungal leaf disease in 2017 and its subsequent spread infecting nearly 0.4 million hectares of mature rubber trees in the country. ?
2. The senile structure of rubber holdings also contributes to the poor yield. For obtaining the desired yield from a holding, the trees must be uprooted on expiry of their economic life (At about 25 years after planting) and replanted with improved clones. But resource-poor farmers are often compelled to postpone replanting due to the high cost of replanting, lack of other income sources to survive during the long gestation period, and uncertainty over the long-term prospects from the venture. Lack of financial incentives for replanting or other forms of attractive institutional support also compel the farmers to retain aged trees. As a result, the rubber holdings in Indonesia are dominated by senile trees characterized by uneconomic yield.
3. The yield has also been impacted by the sharp fall in NR prices from 2016 onwards. NR supply from Indonesia largely comes from resource-poor smallholders for whom rubber cultivation is a hand-to-mouth existence. Uneconomic prices and lack of institutional support often compel them to abstain from maintenance of rubber holdings. The poor yield from trees, on the top of the unattractive prices, often makes harvesting uneconomic. Such a situation has compelled a section farmer to totally abstain from tapping the trees. Although authentic data are not available, many smallholders have reportedly cut down their trees and shifted to other crops to find a livelihood, especially during the pandemic period.

The poor yield from trees, farmers’ abstention from harvesting, and shift to other crops have finally resulted an acute shortage of raw rubber (Cup-lump and slab), making it difficult for the block rubber (TSR) processing companies in the country to operate smoothly. The poor domestic availability makes cup-lump expensive to the block rubber processing companies. TSR becomes more expensive when the processing factories try to pass on the extra cost of raw material to it.?The following table shows the unit value of TSR exported from Indonesia to several countries during June 2022.?

TSR processing companies in Indonesia are increasingly challenged by the TSR coming to the global market from low-cost countries, particularly Ivory Coast. It is striking to note that the unit value of TSR exported from Indonesia to the U.S. in June 2022 ($181.1 per 100 kg) was considerably higher compared with that from Ivory Coast (US$162.9 per 100 kg). Many TSR factories in Indonesia are finding it difficult to operate viably due to the high raw material prices in the domestic market and the increasing competition from low-cost TSR from Ivory Coast. Several TSR processing factories in Indonesia have discontinued the operations as they find the business economically unviable under the prevailing condition. Several companies could not recover from the financial damage caused by the COVID-19 pandemic.

Based on the trends in the quantity exported during the first half of the year, the production of NR in Indonesia during the year 2022 is expected at 2.80 million tonnes, down 8.0% from the previous year. Strikingly, the production of has been on a declining trend from 2018 onwards as it is evident from the following chart.

The declining trend is likely to continue unless the rubber holdings in the country are transformed to be economically viable by raising the average yield. It calls for a well-designed accelerated replanting programme, supported by attractive financial incentive that meets the huge replanting cost and the development cost till replanted trees start yielding after the nearly seven-year long gestation phase. Such a programme should also have a component to support the livelihood of the farmers during the long gestation period. The government can subsequently recoup the amount by levying a cess on exports once the replanted trees start yielding.?Indonesia has the potential to double its average yield of NR from the prevailing 1,000 kg per hectare. When the yield from trees doubles, the cost of production per kilogram of cup-lump gets halved. ?A massive replanting programme also offers the opportunity to adopt the improved clones and smart clones which are tolerant to diseases and adverse effects of climate change.

Your valuable comments and feedback can add value to the above thoughts.

Thank you.

Jom Jacob (Email: [email protected])