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Thai rubber industry to destroy trees in effort to boost prices

SHARE Thai rubber industry to destroy trees in effort to boost prices

BALI, Indonesia (Bloomberg News Service) — Thailand, the world's top producer of natural rubber, plans to destroy more than 2 percent of its rubber trees a year after stockpiling efforts failed to boost prices from near 30-year lows, officials said.

The government plans to start logging plantations by the end of this year and shift farmers to planting other crops. Thailand produces a third of the world's natural rubber.

"This augurs well for rubber prices — you'll see supply drop a lot," said Tan Swee Hua, managing director at Getahindus (M) Sdn Bhd, a rubber trading company in Malaysia. Malaysia has tried to reduce rubber supply several times since the 1970s, only to see cuts in its supply offset by increased output by Thailand and Indonesia, he added.

Thailand, Indonesia and Malaysia, which produce 85 percent of the world's rubber, agreed this month to restrict supply to help farmers get prices that can sustain cultivation.

Thailand's first concerted effort to cut trees could boost rubber prices and hurt tiremakers, analysts said. The global tire industry buys $6.8 billion worth of natural rubber a year, with the top eight makers, including Goodyear Tire & Rubber Co. and Bridgestone Corp., buying 45 percent of world supply.

Production has declined as much as 25 percent in Malaysia and almost 15 percent in Thailand this year.

Output also declined in parts of Indonesia as low prices since last year prompted farmers to switch to other crops. Any trees destroyed will take years to replace, because seedlings need some five years to reach maturity and produce the latex or sap that is further processed into blocks and sheets of rubber.

The plan to cut down rubber trees and help farmers replant with oil palm or other crops will get funding from Thailand's timber industry, which faces a shortage of wood, said Choositt Ophaswongse, president of the Thai Rubber Association.

"The timber industry lacks timber, and rubber wood is the best wood available," said Choositt. "The timber industry is ready to fund the government's program" to log rubber plantations.

The timber industry is proposing loggers pay the government 43,520 baht for each hectare of rubber trees they are allowed to cut. Timber merchants will separately pay rubber farmers for the timber, with the government using the payments from the industry to boost its Rubber Replanting Aid Fund.

That proposal, which could cost Thailand's timber industry almost 1.5 billion baht ($36 million) a year, will go to the cabinet for approval in a few days, Choositt said.

Choositt hopes the logging of plantations will hold the country's annual production of natural rubber at 2.2 million tons, offsetting output from rubber trees planted in the last decade and now beginning to yield latex.

Persuading farmers to switch to other crops is the best chance the rubber industry has to boost prices after earlier efforts by Thailand and Malaysia and an international price support organization to buy rubber failed to shore up prices, industry officials said.

"Getting farmers to cut trees isn't easy," said Suharto Honggokusumo, executive director of the Rubber Association of Indonesia. "But we've seen it happen in North Sumatra and West Kalimantan" where farmers were lured by the profits in palm oil to replant with oil palm trees.

In Thailand, the lure for farmers will be the high price of rubber wood, officials said.

"As long as the price of rubber wood is up, they should go on cutting," said Wate Thainugul, a manager at the Thai rubber Association who said he expects logging to start within this year.

Thailand will have to take the lead in reducing rubber planting to restrict output because Indonesia, the world's second-largest producer, doesn't have the funds to enact a similar program.

Complicating the problem for the three major producers are efforts by Vietnam and Cambodia to encourage rubber cultivation. Vietnam aims to almost double rubber planting to 700,000 hectares by 2005, boosting output to 350,000 tons.

Increased output from these countries could negate any switch by Thai and Malaysian farmers to oil palm cultivation, Choositt said.

Stable world output could keep prices close to present levels because world demand, expected to grow 2 percent this year, is not likely to rise enough outstrip supplies, he said.

Choositt disputed a forecast by the London-based International Rubber Study Group projecting a yearly shortage of 200,000 tons within three years as rubber farmers switch to other crops.

World natural rubber output totaled 6.8 million tons in 1999, outstripping consumption of 6.66 million tons.

Apart from reduced output, rubber producers' chances of seeing prices rise depend on economic growth in the U.S. and Europe and a recovery in Japan, said Tony Prasetiantono, economist at Indonesia's Gadjah Mada University.

"The years of 2000 and 2001 will see a U-turn for better world economy and growing market for rubber," he said.

Rubber futures in Tokyo surged 24 percent during July after staying close to 30-year lows since March.