Costs of raw materials have raised several times ever since the depreciation of the US$ against most of the Asian currencies. Asia has traditionally been a major exporter of raw materials and cheap labor. However due to inflation, a stronger currency and high demand from PRC and India to sustain their fast growing economy, raw materials prices have been pushed to new heights. Average selling prices of rubber have risen from $2,773 per ton to $3,565 per ton since the start of 2007 and this represented a 28.6% increase.

High Initial Outlay

To start a rubber plantation requires a huge amount of funds. In addition, the operator has to source for land suitable for rubber planting as well as obtain approval from the ruling government in the country. In the world, not many countries are suitable for rubber plantations due to climate changes. African countries such as Cameroon and Ivory Coast and Southeast Asian countries such as Malaysia and Indonesia have suitable land for rubber planting. For African countries, the government may provide the land for a cheaper amount, given that the companies provide living facilities for its people. This includes the erecting of houses for the rubber tappers and building schools and hospitals for their children. Also the building of a rubber processing factory could cost $4m and above. All these does not include the building of roads and sub-roads in the plantation and costs of maintaining the plantation site.

Subject To Several Factors

Rubber plantations are labour intensive markets. Tappers would tap the trees 2 times per day to ensure that the rubber trees last longer. However rubber thieves may tap during wee hours in the night and this would damage the rubber tree in the long run. A rubber tree would be suitable for tapping after planting it for 7 years, though some plantations tap it after 5 years. In most countries, the median would be 550 rubber trees per hectare. Optimal rain for the rubber plantations would be from 1,800-2,300mm/year. Anything more or less could affect the yield and quality of the rubber latex.

If natural disasters such as El Nino falls on the plantations, the entire harvesting for the year could be wasted. Forest fires are a big threat in Indonesia for plantations. Being labour-intensive, rubber plantations are also subjected to union strikes or civil unrest. Rubber tapping is seasonal, with 2/3 of the production coming from the second half of the year. During off-peak seasons, tappers would return to their homeland and not all are expected to return. Rising oil costs affects the cost of production as processing factories requires substantial oil.

Commodity In Demand

Just like oil, rubber is a commodity in high demand. From condoms to car tyres, rubber is a necessity to our everyday living. Demand for rubber is growing at 4% annually whereas supply grows 3% annually thus there is always demand for rubber. Some rubber plantations specialize in extreme tapping to earn more from the high rubber price while other plantations would ensure the high quality of the latex by not over-tapping. Once the rubber trees have matured, plantations can sell the trees as rubber wood and this would translate to another form of earnings.

GMG Global is the only Singapore-listed company specializing in rubber production and plantation. It has rubber plantations in Africa and Indonesia. Rubber prices are expected to continue to rise but may rise at a faster pace if natural disasters strike the plantations, resulting in a demand crunch.