Economics - Demand and Supply

Demand and Supply

Case Study

Rubber Shortage

Rubber is an important material. However, we face a rubber shortage. How would the market react? Why does the market react in this way? By using the economic lens, how can we explain what happened in the real world?

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Unit Quiz

Co-creation

Source A: Rubber

Natural rubber is produced from the white sap of the Heavea brasiliensis tree, which is abundant in areas with a tropical climate. Major producers are heavily concentrated in Southeast Asia, with Thailand being the largest producer and exporter, accounting for more than one-third of global exports of natural rubber, followed by neighboring Indonesia, Vietnam, and Malaysia.

It is a critical raw material in many industrial supply chains because of its unique properties such as high durability, flexibility, and water resistance that make it invaluable for a wide range of products. No direct replacement material that possesses all these properties is currently available on the market.

Figure 5: 2018 Rubber exports by country. Source: Global Rubber Markets (GRM)

Figure 2: Natural rubber contract prices for grade PSSS3 in USD/kg between April 2020 and February 2021. Source: Singapore Commodity Index

Source B: Rubber Shortage

Producers of consumer electronics and household appliances, medical equipment and car makers are now on high alert due to the growing threat of scarce natural rubber supplies that has intensified over the past 12 months amid the global outbreak of COVID-19. Many companies active in the rubber and plastics industry have been facing raw material supply shortages.

Under the growing supply shortage, contract prices for natural rubber have reached a four-year high in the first months of 2021.

In 2011, rubber plantations were encouraged by high prices to plant more rubber trees, which caused an oversupply in the market and led to lower prices in the following decade. The persistently low prices have since given farmers little incentive to plant more trees. As supply started to tighten in mid-2020 due to the exponential demand for rubber gloves amid the COVID-19 pandemic, farmers have also faced a labor shortage due to COVID-19 restrictions for migrant workers.

Source C: Rubber Supply

With synthetic rubber (人造橡膠) being a viable alternative only for specific applications and rubber trees needing about seven years to mature, available supply is unlikely to expand significantly in the near future. Due to the COVID-19 lockdown period in the first half of 2020, the problem gets worse.

In addition, the global supply of rubber is exposed to weather disruptions, which were particularly extreme in 2020. Thailand has experienced its worst drought in decades in the early part of 2020, followed by severe flooding in its southern region which damaged rubber plantations. Likewise, neighboring Vietnam was particularly affected by an above-average typhoon season, with nine named typhoons having made landfall on its coastline and some of them moving inland towards Thailand. The high levels of precipitation in parts of Southeast Asia further created a favorable environment for a fungal leaf disease that damages rubber trees, one that has been spreading in the region since 2019.