BANGKOK (Reuters): The Thai Government approved on Tuesday a 15 billion baht ($477 million) budget plan to prop up rubber prices, but the impact of the farmer-friendly intervention is likely to be shortlived because of weak demand.
The Government agreed to buy unsmoked rubber sheet (USS3) from farmers at 120 baht ($3.82) per kg, up from the market price of 90 baht at the end of 2011, a senior Agriculture Ministry official said.
Prices immediately moved higher although some traders wondered how long that would last, given that demand is usually low at this time of the year and may remain weak in the next few months because of the slowdown in the global economy.
Debt crisis fears
China is the world’s largest rubber consumer, and there are fears that the debt crisis in Europe could crimp demand for tyres.
“The intervention programme can start right away and we are looking to buy 200,000 tons or more to shore up prices,” Apichart Jongsakul, Head of the Office of Agriculture Economy, told Reuters.
The price of benchmark export-grade smoked rubber sheet (RSS3) halved from a record high of $6.40 per kg in February 2011, hitting a low of around $3.40 this month.
That has dragged down the price of unsmoked sheet, which farmers sell to rubber factories, and farmers have staged protests to demand the government intervene. Unsmoked sheet was quoted at 110 baht per kg on Tuesday.
RSS3 was offered at $4.00 per kg, having risen recently in anticipation of the intervention scheme and because of limited supply, with many operators in the main producing countries, Thailand, Indonesia and Malaysia, on Lunar New Year holidays.
The benchmark TOCOM rubber contract for June delivery, which sets the global trend, jumped more than 3 per cent to 315.3 yen per kg, around a three-month high.
TOCOM has risen around 15 per cent since Jan. 11, when the government and farmers said they had agreed on an intervention plan.
Thailand, the world’s biggest rubber producer and exporter, produces around 3.0-3.2 million tons of rubber a year, so the 200,000 tons represents about 6.5 per cent of output.
It exports around 2.8 million tons a year, around 36 per cent of the global rubber trade, according to the Association of Natural Rubber Producing Countries (ANRPC), which groups countries accounting 92 per cent of world output and exports.
Prices rise may be short lived
Supply starts to tighten in Thailand at this time of year, with the dry season approaching, and traders said prices could rise later this week when the Lunar New Year holidays end.
But the medium-term trend was unclear, given Europe’s debt crisis and the gloomy world economic outlook.
Kazuhiko Saito, Chief Commodities Analyst at trading house Fujitomi in Tokyo, said TOCOM traders would be cautious.
“The last-minute buying here was helped by the news,” Saito said. “But the mood in general is ‘Let’s sell on the fact’, as they have bought in advance.”
“We’re now looking to see if Chinese buying resumes after their New Year and how supply is affected during the wintering period,” he added.
There were also question marks over the capacity of the Thai government to intervene.
It would need some 24 billion baht, around $763 million, if it wanted to buy 200,000 tons of rubber at 120 baht per kg, well above the 15 billion baht approved.
In addition to its rubber intervention, the government is committed to buying rice at a price way above market rates, at a cost of up to 50 billion baht. It also needs to find up to 350 billion baht for a series of water management and flood prevention schemes after devastating floods last year.
The government’s total budget deficit in the year to Sept. 30 was originally planned to be 350 billion baht, increased to 400 billion after the floods.
Funding for the scheme
Asked about funding for the rubber scheme, Apichart said: “The fund would be a soft loan from a state-owned bank to be paid to rubber cooperatives across the country to buy rubber and keep in stocks.”
Pongsak Kerdwongbundit, president of the Thai Rubber Association, was confident the government’s plan would keep export-grade RSS3 above $4.0 per kg but would not say whether he thought the price could go back towards the record of $6.40.
Edy Irwansyah, Executive Secretary of the North Sumatra branch of the Indonesian Rubber Association (Gapkindo), said prices were unlikely to stay high for very long as demand was poor.
“At a time when rubber production in Southeast Asia is falling because of wintering, the intervention by the Thai government will definitely push up prices in the international market. But the impact will be short-lived because buying interest during this period is also low,” he said.