Producers of natural rubber used mostly in tires are creating a global surplus for the fourth straight year, leaving prices mired in a bear market that is the worst of any major commodity.

Farmers will expand output faster in 2014 than the gain in demand from surging car sales, creating the biggest glut in at least a decade, the International Rubber Study Group said May 2 in an estimate that was triple its forecast in December. Futures in Tokyo, down 62 percent from a record in 2011 after touching a four-year low last month, may drop 11 percent further to 180 yen a kilogram ($1,761 a metric ton) this year, a survey of 13 analysts by Bloomberg News showed.

Lower prices in the $26 billion rubber market are providing an earnings jolt for tire makers including Pirelli & C. SpA and Bridgestone Corp. and squeezing profit for small farmers who “tap” rubber-tree bark and account for about 80 percent of supply. While top producer Thailand is taking steps to curb output as it has during previous slumps, lower-cost growers including Vietnam and Indonesia are still profitable and show no signs of cutting back.

“I have a family to feed,” said Indonesian farmer Lukman Zakaria, 64, who owns 200 hectares (500 acres) on the island of Sumatra that produce about 1.2 tons of latex per hectare annually. Zakaria said he can’t afford to reduce production, even with lower prices.

Worst Commodity

Futures on the Tokyo Commodity Exchange plunged 26 percent this year to 202.9 yen as of yesterday. That’s four times the drop in copper, the worst-performing commodity among 24 tracked by the Standard & Poor’s GSCI Spot Index, which gained 2.6 percent over the same period. The MSCI All-Country World Index of equities added 2 percent, and the Bloomberg U.S. Treasury Bond Index rose 2.6 percent.

Rubber trees are grown mostly near the equator and yield a milky latex that is retrieved by farmers, or tappers, who cut into the bark, allowing the liquid to seep into containers. The material is processed, dried and tied into bales for sale to manufacturers.

This year’s production surplus will exceed last year’s 714,000 tons, according to the IRSG, a Singapore-based organization that includes 36 producing and consuming countries. The Rubber Economist Ltd., a London-based industry adviser, estimated the glut at 652,000 tons, or 78 percent larger than what it expected in December.

While Thailand probably will cut production by 80,000 tons to 4.06 million tons this year, the combined output of Indonesia and Vietnam will rise by 97,000 tons to 4.13 million tons, The Rubber Economist estimates. The three countries account for about two-thirds of world output.

Lower Costs

Indonesia and Vietnam are vying for a bigger share of a market dominated by Thailand, which supplies a third of the world’s rubber, according to Fujitomi Co., a broker in Tokyo.

Lower wages mean production costs in Vietnam, the third-largest supplier, are about 15 percent less than in Thailand, and Indonesia is 10 percent less, said Takaki Shigemoto, an analyst at researcher JSC Corp. in Tokyo who correctly predicted in February that prices would drop to 200 yen. Vietnam probably won’t cooperate in efforts to reduce output, he said.

In August 2012, Thailand, Indonesia and Malaysia agreed to limit exports, cut down old trees and stockpile rubber to end a slump in prices. The commodity rallied as much as 64 percent by February 2013. Since then, futures have tumbled 40 percent and last month touched 196.7 yen, the lowest since September 2009.

Failed Efforts

The International Rubber Consortium, which consists of the three countries, urged members in February to refrain from selling at low prices.

“Supply restrictions have not worked because of the practical difficulties of ensuring compliance from millions of small holders,” Michael Coleman, who helps manage the $139 million Merchant Commodity Fund in Singapore, said on May 7. The fund trades rubber in Singapore and Tokyo.

World output may rise 1.1 percent to 12.2 million tons this year, while usage expands 1.7 percent to 11.5 million tons, according to a quarterly report by The Rubber Economist.

Dry weather and rising demand may leave the surplus smaller than forecast. Chances have increased for an El Nino that can parch regions in Asia. Australian forecasters issued an alert on May 6 saying the pattern, triggered by a warming of the tropical waters of the Pacific Ocean, may start in July.

Weather Risk

Reduced moisture may curb output from Thailand, Indonesia and Malaysia by as much as 8 percent in 2014, the International Rubber Consortium said March 14.

More new autos on roads around the world will mean increased demand for rubber used in tires. Global sales of cars and light commercial vehicles will rise 5 percent to a record 88.4 million units this year, estimates LMC Automotive Ltd., a research company in Oxford, England.

In China, the largest rubber user, auto sales will increase 10 percent this year, the state-backed China Association of Automobile Manufacturers forecast. The country will boost rubber imports by 11 percent to 4.26 million tons, the Association of Natural Rubber Producing Countries said this month.

Reduced output by top producers won’t be enough to erase the global surplus, Prachaya Jumpasut, managing director at The Rubber Economist, said on April 28. Rubber fell into a bear market in January as inventories in Shanghai climbed to a nine-year high.

Nguyen Huy Hoang, who owns a 14-hectare plantation in Gia Lai province in Vietnam’s Central Highlands, has no plans to produce less. “Although prices are low and my margins have shrunk, I can still make profits,” he said. “I still need income from rubber to provide for my family.”

Source: http://www.bloomberg.com