Waiting for trees to grow
The last few times I’ve been in the Ivory Coast I’ve heard a lot of talk of hevea or rubber tree plantations. Since early 2000s, among well-off Ivorians there seems to be a trend to invest in rubber trees. I considered joining in, but never did for the following reasons:
- It takes up to 7 years from planting a tree until one can start getting rubber from it. While I like long term thinking and investing, I figured I would be in a better position after seven years investing, and re-investing profits from something else like taxis or real estate.
- I thought synthetic rubber would squeeze out the use of natural rubber over time.
- I like to invest in something linked to the growth of the Ivorian economy – on which I’m quite bullish. Selling stuff to the growing African middle class seems to be the right place to be. Global demand for rubber has nothing to do with the Ivory Coast, and all to do with the developed world’s and China’s industrial demand for it.
- Ivory Coast’s and Africa’s exports are already dominated by raw materials. It would feel better to do something with a little more value added.
“I sure as hell wouldn’t want to be in a 747 about to land on synthetic tires”
However, I’ve read a bit about natural rubber and started to re-think some of the above.
Apparently there are plenty of uses where natural rubber is better suited than synthetic rubber – and it’s not looking like it will change. In fact, according to www.rubber-foundation.org, the share of natural rubber of total world rubber production has gone up from 41.6% 1998 to 46% 2008, and is projected to increase further.
Despite the brilliance of industrial chemists, there is still no synthetic able to match natural rubber’s resistance to fatigue and vibration. Natural rubber still claims more than 40% of the market, a figure that has been slowly rising. Only medical rubber can be steam cleaned in a medical sterilizer, then thrust into a freezer – and still adhere flexibility to glass and steel. Big airplane and truck tires are almost entirely natural rubber; radial tires use natural rubber in their sidewalls, whereas the earlier bias-ply tires were entirely synthetic. High-tech manufacturers and utilities use high-performance natural rubber hoses, gaskets and O-rings. So do condom manufacturers.
“I sure as hell wouldn’t want to be in a 747 about to land on synthetic tires” the director of the U.S. National Defense Stockpile Center has said.
From the excellent book “1493” by Charles Mann, part of my post-Christmas reading
As to having to wait 7 years to get any returns, my problem with that was that the initial investment could be better put elsewhere. Now, I have learned that a typical small scale rubber tree plantation deal in the Ivory Coast doesn’t have much of an upfront cost. It works like this; a village that owns land but doesn’t have the funds to cultivate it, allows an investor to plant and maintain rubber trees, and then the profits are typically split 25% to the village and 75% to the investor. Planting the trees doesn’t cost much, and the invested funds mainly go to pay the upkeep during the 7 years, paid monthly.
A plantation that has grown for a couple of years can of course be bought or sold, so nobody really has to wait 7 years. However, there are a lot of things that can go wrong in these type of deals, and if I ever invest in a rubber tree plantation, I’ll probably start from scratch.
My remaining concerns about rubber tree investments still stand though. Natural rubber is a curious product, being agriculturally produced but used industrially. Demand for it is much more correlated to stuff like iron ore or copper than other agricultural products like wheat, soy-beans or apples. And here lies a problem, since I have a gloomy outlook on the industrialised world’s economic prospects and believe China will see a real estate crash. Demand from China has been a big factor in driving up industrial commodity prices over the last decade and I don’t think this demand is sustainable.
Also, the 7 year lag of rubber, makes long term forecasting and planning important – and that’s not always something humans excel in. I have a feeling a lot of rubber trees are planted when prices are high, thus contributing to reducing prices 7 years later.
It seems like major new plantations were started in Asia in 2006-2007:
On the supply front, natural rubber trees were planted in large scale in both 2006 and 2007. Once planted, it takes approximately 6 to 7 years for rubber trees to begin producing sap. Supply is therefore inelastic in the short–term and will be limited until 2013. It is estimated that newly planted acreage of natural rubber trees totals in excess of 1 million hectares. According to the International Rubber Study Group (IRSG), global natural rubber output is expected to total 10.83 mm tons, (up approximately 5% year-over-year). Although helpful in the short-term, long-term supply will not increase markedly until 2013.
So it looks like increased supply could coincide with decreased demand in 2013-2014 – and it’s not difficult to see what that would do to natural rubber prices.
The coolness factor
On the other hand 2013-2014 could be a good time to start a plantation, and one never know what will happen. And I got to admit that I would enjoy being able to say that I own a rubber tree plantation.
Rubber trees originally come from the Amazon in Brazil but due to leaf blight plantations in the whole of Latin America don’t work out too well. Instead, 90% of the world production of natural rubber comes from Asia (and 2% from the Ivory Coast), and if leaf blight were to hit Asia things would change dramatically.