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Economy

Indonesia rubber woes highlight infrastructure deficits

JAKARTA -- Amid a sustained fall in global rubber prices, the head of Indonesia's main rubber producers' group has warned that the industry faces decline unless President-elect Joko Widodo takes urgent action to improve the country's infrastructure.

     Daud Husni Bastari, chairman of the Rubber Association of Indonesia, said Widodo, who takes office on Oct. 20, must deliver on campaign pledges to improve infrastructure. "We need ports, we need roads," Daud told the Nikkei Asian Review.

     Indonesia is the world's second-biggest producer and exporter of rubber, behind Thailand and ahead of Vietnam and Malaysia. All are grappling with a slide in prices for natural rubber, which has fallen by more than half since 2011 and is close to a five-year low at about $1.46 per kilogram on the Singapore Exchange.

     Industry representatives and government officials have held several meetings in Malaysia in recent days to try work out a solution to the price fall, with support apparently growing for Indonesian proposals for a $1.50 minimum price.

     Malaysia backed that proposal on Oct. 13 at a Kuala Lumpur meeting of the Association of Natural Rubber Producing Countries, which comprises 11 countries accounting for 90% of the world's natural rubber supply.

     However, it was unclear what effect the proposed minimum price would have.

     The industry is suffering from widespread concerns about global growth, together with oversupply by producers, which has led to widespread stockpiling and in turn prompted concerns in Indonesia about the future of the country's rubber sector.

     "We are tired of shouting at the governments," said Aziz Pane, chairman of Indonesia's Tire Manufacturers Association. "We need better infrastructure if we are to improve."

Lagging infrastructure

A June 2014 World Bank report highlighted the poor state of Indonesia's infrastructure -- pointing out that Jakarta's main port had only a fifth the capacity of neighboring Singapore. The bank said that Indonesia's road network had been extended by 35% in the last 10 years, compared with a 300% surge in car numbers over the same period. "Closing the gap is crucial for attaining higher productivity, competitiveness and growth," the bank said.

     Work began in early October on a proposed Trans-Sumatra highway, which would cross the Indonesian archipelago's biggest island, where around 70% of the country's 3.4 million hectares of rubber trees are located. The 2,700km road would significantly improve transportation for rubber farmers, but completion depends on resolution of a number of land disputes along the route.

     Indonesia had a thriving rubber processing industry in northern Sumatra in the 1980s, focusing on gloves and tires. But it has since ceded its position as the leading manufacturer of rubber gloves to Malaysia, the world's fourth largest rubber producer. In 2012, Malaysia's share of the global glove market was 63%, with Indonesia lagging at 13%, according to data presented at the International Rubber Glove Conference and Exhibition in Kuala Lumpur last year. 

     Indonesia's rubber association, also known as Gapkindo, said that infrastructure problems were so serious that it was often cheaper for Indonesian rubber glove makers to import Malaysian rubber than to have Indonesian rubber trucked or shipped from Sumatra or the Indonesian part of the island of Borneo, the country's second-largest rubber-growing province.

     "The factory in Indonesia gets the material from Port Klang [in Malaysia]; it's ridiculous," said Daud.

   As a result of the infrastructure problems, only one global tire maker operates a factory in Indonesia, in spite of the easy availability of natural rubber supplies - South Korea's Hankook opened a 60 hectare factory in West Java last year.

     Indonesia's economy is heavily reliant on natural resources, which make up around 60% of exports. The country's rubber exports were worth $6.91 billion in 2013, mostly to the U.S., China, and Japan. But only 15% of Indonesia's rubber stayed in the country, highlighting the dearth of local processing industries, which provide more sustainable returns than exporting the raw commodity.

     Improving infrastructure is high on Widodo's list of priorities, but analysts say he may find it difficult to force through controversial reforms because parties that backed the defeated presidential candidate Prabowo Subianto have a majority in parliament.

Fuel subsidies are key

A key issue will be fuel subsidies, which underpin cheap gasoline prices for consumers but absorb about a fifth of government spending -- some of which could be allocated to infrastructure improvements if the subsidies were reduced.

     Widodo told Reuters last week that his priorities were "how to solve the problem of fuel subsidies, infrastructure like roads, railways and [ports] ... and bureaucratic reforms, which means business licenses, permits and regulations."

     About 85% of Indonesia's rubber is tapped by 2 million smallholders, who typically work plots amounting to two hectares. Lina Fatayati Syarifa, an economist with the Indonesian Rubber Research Institute, said that farmers' earnings had been almost halved since 2011.

     This was forcing some farmers to consider other work, or to think about cutting down rubber trees and switching to oil palm, Syarifa told NAR.
     "Tappers leave rubber farms, [and] family members look for work elsewhere, such as in infrastructure projects and mining," she said.

     According to Gapkindo, one hectare of rubber trees produces about 2,000kg of rubber per year, which means that farmers can earn only $3,000 per hectare if the commodity is traded at the new recommended minimum price of $1.50 per kilogram.

     However, protests or strikes are seen as unlikely in Indonesia, compared with neighboring Thailand, where rubber farmers protest regularly and are threatening to demonstrate again if Thailand's military-backed government forces prices up quickly.

     "In Thailand rubber is a political commodity; in Malaysia it is purely business; in Indonesia it is a social issue," said Daud.

     Previous attempts by Thailand, Indonesia and Malaysia to shore up prices have had little effect in the face of weak demand and growing supply from other Southeast Asian producers in the narrow belt around the equator where rubber trees will grow.

     "There has been cooperation between the governments of Thailand, Indonesia and Malaysia through the International Tripartite Rubber Corporation; however, it is not effective to improve the rubber price," said Syarifa. "It is because of the oversupply of natural rubber, decreasing of natural rubber demand, especially from China, and increasing of natural rubber supply from the new rubber producing countries such as Vietnam, Cambodia, Laos and Myanmar."

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