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Drought cuts rubber output, pushes up costs

The dry spell that started in the fall of 2009 is hurting China's industrial sector, despite affecting mainly agricultural provinces in the southwest.

China needs to experience at least 10 instances of medium to heavy volume of persistent rain to ease the aridity in Chongqing, and the provinces of Yunnan, Guizhou, Guangxi and Sichuan. Otherwise, productivity in the export manufacturing industries and, consequently, delivery lead times may be significantly impacted.

Drought cuts rubber output, pushes up costs

Although the southwestern provinces are traditionally agricultural, some industrial sectors hold base there. Yunnan, for instance, is one of the country's major manufacturers of rubber. Last year, the province turned out 302,000 tons of raw rubber, contributing nearly 39 percent to annual yield. The months-long drought, however, is curtailing volume, which is projected to decrease 10 to 20 percent if the situation does not improve before June.

China already imports much of its rubber requirement from Indonesia, Malaysia, Thailand and Vietnam. But the drought affecting the country's southwest is felt by all areas along the Mekong River, which includes Thailand and Vietnam. Demand for rubber, meanwhile, continues to grow alongside heightened production of tires. As a result, the cost of natural rubber increased to 25,000 yuan ($3,660) per ton in April, up 12 percent from just two months back.

Publicly listed tire maker Aeolus said rubber in the domestic and international spot markets is now 10 to 14 percent more expensive than it was in October 2009. Among local processors, Kunming Yun Ken Rubber Co. Ltd, which currently turns out two-thirds less than its average yield, offers natural rubber at more than 24,000 yuan ($3,510) per ton.

There is concern that rubber costs might soar to record highs in H2 2010 if the drought does not ease in May.

No rain, no power

The resulting shortage in electricity is one of the reasons rubber production is hampered severely by the drought. Hydropower is one of the most important energy sources in the southwestern provinces, contributing 45 to 50 percent to total supply. The extended dry season, however, has made it difficult for hydropower stations to generate their full load. As such, the region is now 25 to 30 percent short of its electricity requirement.

Apart from rubber, nonferrous metal such as copper, aluminum, zinc and tin is widely processed in Yunnan. But while the energy deficit is slowing down smelting and refining, productivity is not as heavily affected.

Although copper is a major material for the consumer electronics manufacturing industry, the province accounts for only 9 percent of national output. The priority given to large nonferrous metal suppliers, including copper, when it comes to power rationing also resulted in 64 percent month-on-month growth in March yield. Moreover, many of these big processors have standalone power stations.

Aluminum is a key metal as well, particularly for kitchen- and hardware, and housing for some electronic products. The drought and the resulting energy shortfall is affecting electrolysis, with output projected to fall 20 percent by year-end. But this is not such a detrimental development for the industry, which currently has an oversupply of the metal.

The effects of the power deficit, however, have reached even the coastal provinces. Guangdong, for instance, used to acquire 30 percent of its electricity requirement from the southwest. Now, the province supplies a portion of its power load to the interior.

The Guangdong Economic and Information Technology Commission pegs the current shortfall to 3.35mn kW per day. This situation has led to a peak shifting strategy, where high-electricity consuming industries have to carry out their operations at night. The major cities such as Guangzhou and Shenzhen, industrial parks and high-tech enterprises are guaranteed to still have sufficient power.

But if the drought extends to June, then production in Guangdong will inevitably be affected. Businesses that are already reeling from the effects of the labor shortage will have to contend with power outages as well, which can result in missed deadlines and delayed delivery.

Note: This article "Drought cuts rubber output, pushes up costs" was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.

All price quotes in this report are in US dollars unless otherwise specified. FOB prices were provided by the companies interviewed only as reference prices at the time of interview and may have changed.

Disclaimer: All product images are provided by the companies interviewed and are for reference purposes only. Those product images featuring products with trademarks, brand names or logos are not intended for sale. We, our affiliates, and our affiliates' respective directors, officers, employees, representatives, agents or contractors, do not accept and will not have any responsibility or liability for product images (or any part thereof) which infringe on any intellectual property or other rights of a third party.

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