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Agriculture | Indonesia’s Rubber Industry: Increased Competition and Falling Prices

The decline in global natural rubber prices has resulted in a drop in farm-level prices across Indonesia and other rubber producing markets. Indonesian smallholders come under particular pressure given the persistent issues of poor productivity and a weak local downstream industry to support the sector through the troughs of a commodity cycle. Recent volatility has once again placed a focus on the sustainability of Indonesia’s rubber industry and the pressing need to make the sector more competitive as well as to develop value added industries that benefit the local market as well as provide goods to the global export market.

Indonesia’s Rubber Industry: Increased Competition and Falling Prices
The lack of a downstream industry is also one of the main reasons why the absorption of rubber production in the country is relatively low which therefore contributes to an over-supply in the international market

Productivity remains a major issue

Indonesia boasts the largest rubber plantations in the world with a total land area of ​​3.61 million hectares (2014). Rubber plantations in Indonesia are scattered in 27 provinces from Aceh to Papua.  South Sumatra is the province that holds the largest rubber plantation area of ​​812.57 thousand hectares or 22.85%, followed by North Sumatra (472.14 thousand), Jambi (384.78 thousand), Riau (356.24 thousand) and West Kalimantan (350.75 thousand). Indonesian rubber production is also dominated by these five provinces, namely South Sumatra which produced as much as 932.50 thousand tonnes (2014) or 28.80% of Indonesia’s total rubber production.

Over the last three years, Indonesian rubber exports have fluctuated. In 2012, Indonesia's natural rubber export volume reached 2.44 million tonnes worth $7,861.38 million USD. In 2013, exports of natural rubber increased by 10.54% to 2.70 million tonnes worth $6,906.95 million USD. Last year, the volume of rubber exports decreased by 2.91% to 2.6 million tonnes worth $4,741.49 million USD.

Overall, Indonesia is the second largest exporter of natural rubber in the world after Thailand with a market share of 28.7% (2014), followed by Vietnam (8.5%), Malaysia (8.4%) and Ivory Coast (3.6%). Thailand is at the top with 36.5% market share worth $6 billion USD.

Yet, despite having more extensive rubber plantations, Indonesia consistently loses out to Thailand in terms of output because its rubber plantation productivity is low at 1.1 tonnes per hectare per year as opposed to Thailand at 1.7 tonnes per hectare per year. Productivity is therefore a major problem for the Indonesian rubber industry and is largely due to the age of the trees, among other factors. The total area of ​​rubber plantations whose productivity has declined and needs to be replanted is estimated at 400,000 hectares. Rejuvenation programmes for old rubber trees are very difficult to implement because the majority or 85% of Indonesian rubber plantations belong to smallhold farmers; as is the case with most of the country’s major agricultural commodities.  The remaining 15% are owned by state plantation companies (7%) and private companies (8%). Without government incentives and support, it is difficult to encourage smallholders to replant their plantations due to the high cost and the potential loss of income during the process.

This is in contrast to Thailand, where the government strongly supports its rubber industry. Such support includes the establishing of a free trade agreement with rubber importing countries such as China, Australia and New Zealand that led to the imposition of lower tariffs in addition to providing incentives to farmers to rejuvenate rubber trees aged more than 30 years. To compete, the Indonesian government must immediately initiate a replanting programme by providing incentives, quality seeds, fertilisers, technical guidance and soft loans to ensure the survival of its rubber industry.

Falling prices and increased competition

After experiencing a price boom of up to $4-5 USD per kilogram in 2011 due to the overwhelming demand from China, global natural rubber prices continue to decline until today. Throughout 2015, the price of rubber in the international market continued downwards from $1.5 USD per kilogram in January to $1.2 USD per kilogram in November. According to the Adviser to the Rubber Association of Indonesia (Gapkindo) Mr Daud Husni Bastari, this downward trend in prices is expected to continue into 2016 if there is no economic recovery in developed markets. Due to the price reduction, the farm-level price of rubber dropped to 5,000 - 6,000 IDR per kilogram from an all-time high of 25,000 IDR per kilogram in 2011. According to Gapkindo, many rubber farmers are now falling into the low-income category because their yield is no longer able to meet their needs. Moreover, a large proportion of Indonesian rubber farmers are farm workers and tenant farmers who must divide their yield with landowners. As a result, many rubber farmers have switched their professions and become labourers in palm oil plantations (See Indonesian Palm Oil Industry Overview – Biodiesel as a New Source of Revenue Growth).

In addition to the decline in global oil prices and a weakening economy in developed countries such as China, the United States and Europe that impacted the demand, the fall in rubber prices is also due to excessive supply. Currently, outside of Indonesia, Thailand and Malaysia, a number of other ASEAN countries such as Vietnam, Laos, Cambodia and Myanmar also produce rubber. They began planting rubber in 2007 and 2008 when rubber prices rose. As a result, there is an excess supply in the market that leads to the fall in prices.

Due to the fact that these new rubber producing countries did not join the tripartite of Thailand, Indonesia, and Malaysia that was set up to control the supply and price of rubber. This has become a considerable issue given that Vietnam is now overtaking Malaysia as the third largest rubber producer in the world with a production of over 1 million tonnes per year. To that end, the establishment of the ASEAN Rubber Council which will be composed of eight rubber producing ASEAN countries has become a necessity. By forming the ASEAN Rubber Council, rubber producing countries in the ASEAN that account for 70% of global production can restrict and regulate the supply of rubber into the world market and avert over-supply and falling prices.

Lack of a downstream industry

Compared with Thailand's rapidly growing downstream industry, Indonesia’s downstream rubber industry is relatively underdeveloped. Most or 85% of Indonesia's natural rubber production is exported in the form of semi-finished goods such as ribbed smoked sheet (RSS), standard Indonesian rubber (SIR), thick latex, and others. Only 15% is absorbed by the downstream industry locally and this is dominated by tire manufacturers. In 2016, the Trade Ministry is targeting national rubber consumption to increase by 100,000 tonnes from 2015, to reach 700,000 tonnes.

The lack of a downstream industry is also one of the main reasons why the absorption of rubber production in the country is relatively low which therefore contributes to an over-supply in the international market. The situation is worsening in light of lackluster automotive sales throughout 2015 and continuing in 2016, coupled with the increase in material costs for tires due to the weakened rupiah (See Downshifting Demand – Insights into Indonesia’s Automotive Sector).  

Gapkindo is urging the government to support the development of Indonesia’s domestic downstream industry by encouraging and facilitating investors to build rubber processing factories. In addition, the government needs to provide further incentives which may include tax breaks, support for promotion and marketing efforts, among others. With the right incentives in place, Indonesia’s downstream rubber sector offers substantial investment prospects given the country’s abundant rubber supply and competitive pricing as well as advancing progress on infrastructure to reduce logistics costs in the future (See Concrete Developments in Indonesia’s Infrastructure).

Once the downstream rubber industry has been developed, Indonesia’s rubber industry can be less reliant on export markets and thus provide smallhold farmers with greater stability and visibility for their product. That being said, the country’s downstream industry also needs to innovate by finding alternative finished products other than tires which currently absorb 85% of Indonesia's domestic rubber supply.

Moreover, according to Mr Aziz Pane, Chairman of the Indonesian Rubber Council, there is a growing trend in the global tire industry to replace natural rubber with other raw materials. This has been done by two global tire companies, Cooper (USA) and Continental (Germany), which replace rubber raw material with grass.  

To that end, the diversification of the use of natural rubber by the national downstream industry outside of tire manufacturers is becoming a necessity. The government’s development programmes that are placing increased emphasis on the infrastructure sector can be used to absorb national rubber production. This is because rubber can be used for various infrastructure projects such as for asphalt mixtures for greater durability, cushion and fender for ships in port, anti-earthquake components for high-rise buildings, as well as for factory components in various industries such as cement, palm oil, aluminum, sugar, garments, furniture, paint, and electricity. Indonesia’s rubber industry and investors within it therefore have the opportunity to strengthen local demand and foster a sustainable localised rubber market outside of commodity cycles and in tune with the government’s efforts to boost value added manufacturing as well as infrastructure development using local content.

Global Business Guide Indonesia - 2016

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Indonesia Agriculture Snapshot

Contribution to GDP: 13.70% (2016 including Fisheries & Livestock)
Number Employed in the Sector: 46 million (2016)
Main Products: Palm Oil, Palm Kernel, Rubber, Cocoa, Coffee, Tea, Tobacco, Rice, Sugarcane, Maize, Cassava, Tropical Fruits, Spices, Poultry, Fisheries.
Main Export Markets: China, USA, Japan, India, Singapore, Malaysia, Pakistan, South Korea, Italy, Netherlands, Bangladesh, Egypt.
Relevant Law: Presidential Regulation No. 39 of 2014 on the Negative Investment List imposes varying degrees of foreign ownership limitations in plantations depending on the crop type, and Government Regulation No. 98 of 2013 limits private plantations to 100,000 hectares.