Indian farmers turn away from traditional plantation crops as demand for rubber reaches a tipping point.
Rubber to bounce India up table
Kerala is well known the world over for its shady coconut groves and lush spice farms but these traditional plantation items are steadily losing favour with local farmers to another cash crop: rubber.
The farm area for rubber production in the southern Indian state, which meets 90 per cent of India's demand, expanded this year to 12,000 hectares from 9,000ha last year, while the total acreage is expected to double in the next four years, according to the state government. Despite the dwindling acreage in traditional plantation crops, the imminent boost in rubber production is expected to provide a new impetus to Kerala's agrarian economy. The world's consumption of rubber continues to soar - mainly to meet the ravenous demand for vehicle tyres in emerging economies such as India and China, which is creating an acute imbalance between demand and supply and is driving up prices.
The All India Rubber Industries Association (AIRIA), based in Mumbai, estimates rubber consumption will climb from 930,000 tonnes this year to 1.89 million tonnes by 2020.
The surging rubber demand underscores India's rising demand for commodities as a rapidly accelerating economy and growing incomes stoke consumer confidence. India's economy expanded 8.9 per cent for a second straight quarter between July and September.
"Commodity demand has reached a tipping point and growth is set to accelerate significantly," Barclays Capital said in a report released last month. India's commodity markets are gathering momentum with growing interest not only from large institutional investors but also retail investors. Experts say Indian traders are increasingly diversifying their investment portfolios to include commodities that provide superior returns compared with traditional assets such as equities.
India has five national bourses trading on commodities, with daily volume worth about 330 billion rupees (Dh26.85bn), according to the finance ministry.
India is the world's fourth-largest producer and the second-largest consumer of natural rubber. The Automotive Tyre Manufacturers' Association (ATMA) of India says tyre production in the April-to-September period this year increased 28 per cent compared with the same period last year due to the growing demand for cars. Sales of passenger cars might have slowed in developed economies such as the US and Europe but they are soaring in India. Rising disposable incomes, particularly among middle-class Indians, is pushing up demand.
In the April-to-August period this year, car makers in India produced 7,063,063 vehicles compared with 1 million vehicles in the entire 2004- 2005 fiscal year. This year, India emerged as the world's seventh-largest vehicle producer, six years ahead of the government's target for reaching that goal, the ministry of heavy industry said in September.
Vehicle production in the April-to-August period was 32.38 per cent higher than in the same period last year, according to the Society of Indian Automobile Manufacturers, a trade organisation based in New Delhi. The passenger-car segment grew by 34.32 per cent in the same period. Last year, India's vehicle sector, which employs 10 million people, achieved a turnover of more than 2 trillion rupees, according to an economic survey presented in parliament recently by the government. India's vehicle sector grew the second-fastest globally in the previous fiscal year that ended on March 31. With a compound annual growth rate of 14 per cent in the vehicle sector, India is expected to roar ahead of China - growing at 6 per cent - to become the world's fastest-growing car market between now and 2020, according to a recent report prepared jointly by the global consultancy Ernst & Young and the Automotive Component Manufacturers' Association of India.
Per capita, the number of passenger-car owners is very low in India compared with developed economies. Only eight in every 1,000 people own cars, according to CRISIL, a credit-rating agency based in Mumbai. At the current rate of expansion, experts predict, by 2050 every sixth car in the world will be produced for the Indian market.
"We remain positive on the Indian auto sector," the brokerage firm Angel Broking, based in Mumbai, wrote in a recent report. "Demand for vehicles continues to surpass supply, despite the price hike by most auto majors. Over the long term, comparatively low penetration levels, a healthy economic environment and favourable demographics supported by higher per-capita income levels are likely to help auto companies in sustaining their top-line growth."
In September, most vehicle manufacturers posted double-digit sales growth for the fourth consecutive month on the back of rising consumer confidence. Maruti Suzuki, India's leading car maker, which is 54.2 per cent owned by Japan's Suzuki Motors, reported its highest monthly sales in September, an increase of 3.1 per cent from August. The sales volume of 108,006 units was 29.6 per cent more than in September last year.
But amid the rising demand, tyre manufacturers are facing a severe shortage of rubber after Thailand and Indonesia, two of the world's top rubber producers, suffered a sustained rainy season that depleted rubber yield. AIRIA estimates India could face a rubber shortfall of 175,000 tonnes next year and the deficit could rise to 840,000 tonnes by 2020. India's rubber output last month stood at 88,500 tonnes, compared with 93,500 tonnes in the same month last year, according to the Rubber Board, an industry body based in Kerala.
The increasing shortfall drove up imports of rubber to 143,468 tonnes in the April-to-November period from 139,321 tonnes in the same period last year.
To meet demand, the leading tyre manufacturers Apollo and MRF have invested US$3bn (Dh11.01bn) in rubber plantations. The ATMA estimatestyre production will expand 10 per cent to 106 million tyres from this month to the end of March.
Rubber is believed to make up 42 per cent of the total raw material costs for tyre manufacturers.
As prices of rubber rise amid the production-consumption deficit, the ATMA has urged the government to consider levying a fixed import duty on the commodity. Rubber imports are currently taxed at 20 per cent. As the market price of rubber rises, so does the import duty, which is ultimately borne by the end consumer, the association said.