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The International Natural Rubber Market, 1870-1930
Zephyr Frank, Stanford University and Aldo Musacchio, Ibmec SãoPaulo
Overview of the Rubber Market, 1870-1930
Natural rubber was first used by the indigenous peoples of the Amazon basin for a variety of purposes. By the middle of the eighteenth century, Europeans had begun to experiment with rubber as a waterproofing agent. In the early nineteenth century, rubber was used to make waterproof shoes (Dean, 1987). The best source of latex, the milky fluid from which natural rubber products were made, was hevea brasiliensis, which grew predominantly in the Brazilian Amazon (but also in the Amazonian regions of Bolivia and Peru). Thus, by geographical accident, the first period of rubber’s commercial history, from the late 1700s through 1900, was centered in Brazil; the second period, from roughly 1910 on, was increasingly centered in East Asia as the result of plantation development. The first century of rubber was typified by relatively low levels of production, high wages, and very high prices; the period following 1910 was one of rapidly increasing production, low wages, and falling prices.
Uses of Rubber
The early uses of the material were quite limited. Initially the problem of natural rubber was its sensitivity to temperature changes, which altered its shape and consistency. In 1839 Charles Goodyear improved the process called vulcanization, which modified rubber so that it would support extreme temperatures. It was then that natural rubber became suitable for producing hoses, tires, industrial bands, sheets, shoes, shoe soles, and other products. What initially caused the beginning of the “Rubber Boom,” however, was the popularization of the bicycle. The boom would then be accentuated after 1900 by the development of the automobile industry and the expansion of the tire industry to produce car tires (Weinstein, 1983; Dean 1987).
Brazil’s Initial Advantage and High-Wage Cost Structure
Until the turn of the twentieth century Brazil and the countries that share the Amazon basin (i.e. Bolivia, Venezuela and Peru), were the only exporters of natural rubber. Brazil sold almost ninety percent of the total rubber commercialized in the world. The fundamental fact that explains Brazil’s entry into and domination of natural rubber production during the period 1870 through roughly 1913 is that most of the world’s rubber trees grew naturally in the Amazon region of Brazil. The Brazilian rubber industry developed a high-wage cost structure as the result of labor scarcity and lack of competition in the early years of rubber production. Since there were no credit markets to finance the trips of the workers of other parts of Brazil to the Amazon, workers paid their trips with loans from their future employers. Much like indenture servitude during colonial times in the United States, these loans were paid back to the employers with work once the laborers were established in the Amazon basin. Another factor that increased the costs of producing rubber was that most provisions for tappers in the field had to be shipped in from outside the region at great expense (Barham and Coomes, 1994). This made Brazilian production very expensive compared to the future plantations in Asia. Nevertheless Brazil’s system of production worked well as long as two conditions were met: first, that the demand for rubber did not grow too quickly, for wild rubber production could not expand rapidly owing to labor and environmental constraints; second, that competition based on some other more efficient arrangement of factors of production did not exist. As can be seen in Figure 1, Brazil dominated the natural rubber market until the first decade of the twentieth century.
Between 1900 and 1913, these conditions ceased to hold. First, the demand for rubber skyrocketed [see Figure 2], providing a huge incentive for other producers to enter the market. Prices had been high before, but Brazilian supply had been quite capable of meeting demand; now, prices were high and demand appeared insatiable. Plantations, which had been possible since the 1880s, now became a reality mainly in the colonies of Southeast Asia. Because Brazil was committed to a high-wage, labor-scarce production regime, it was unable to counter the entry of Asian plantations into the market it had dominated for half a century.
Southeast Asian Plantations Develop a Low-Cost, Labor-Intensive Alternative
In Asia, the British and Dutch drew upon their superior stocks of capital and vast pools of cheap colonial labor to transform rubber collection into a low-cost, labor-intensive industry. Investment per tapper in Brazil was reportedly 337 pounds sterling circa 1910; in the low-cost Asian plantations, investment was estimated at just 210 pounds per worker (Dean, 1987). Not only were Southeast Asian tappers cheaper, they were potentially eighty percent more productive (Dean, 1987).
Ironically, the new plantation system proved equally susceptible to uncertainty and competition. Unexpected sources of uncertainty arose in the technological development of automobile tires. In spite of colonialism, the British and Dutch were unable to collude to control production and prices plummeted after 1910. When the British did attempt to restrict production in the 1920s, the United States attempted to set up plantations in Brazil and the Dutch were happy to take market share. Yet it was too late for Brazil: the cost structure of Southeast Asian plantations could not be matched. In a sense, then, the game was no longer worth the candle: in order to compete in rubber production, Brazil would have to have had significantly lower wages -- which would only have been possible with a vastly expanded transport network and domestic agriculture sector in the hinterland of the Amazon basin. Such an expensive solution made no economic sense in the 1910s and 20s when coffee and nascent industrialization in São Paulo offered much more promising prospects.
Natural Rubber Extraction and Commercialization: Brazil
Rubber Tapping in the Amazon Rainforest
One disadvantage Brazilian rubber producers suffered was that the organization of production depended on the distribution of Hevea brasiliensis trees in the forest. The owner (or often lease concessionary) of a large land plot would hire tappers to gather rubber by gouging the tree trunk with an axe. In Brazil, the usual practice was to make a big dent in the tree and put a small bowl to collect the latex that would come out of the trunk. Typically, tappers had two “rows” of trees they worked on, alternating one row per day. The “rows” contained several circular roads that went through the forest with more than 100 trees each. Rubber could only be collected during the tapping season (August to January), and the living conditions of tappers were hard. As the need for rubber expanded, tappers had to be sent deep into the Amazon rainforest to look for unexplored land with more productive trees. Tappers established their shacks close to the river because rubber, once smoked, was sent by boat to Manaus (capital of the state of Amazonas) or to Belém (capital of the state of Pará), both entrepots for rubber exporting to Europe and the US.
Competition or Exploitation? Tappers and Seringalistas
After collecting the rubber, tappers would go back to their shacks and smoke the resin in order to make balls of partially filtered and purified rough rubber that could be sold at the ports. There is much discussion about the commercialization of the product. Weinstein (1983) argues that the seringalista -- the employer of the rubber tapper -- controlled the transportation of rubber to the ports, where he sold the rubber, many times in exchange for goods that could be sold (with a large gain) back to the tapper. In this economy money was scarce and the “wages” of tappers or seringueiros were determined by the price of rubber. Wages depended on the current price of rubber; the usual agreement for tappers was to split the gross profits with their patrons. These salaries were most commonly paid in goods, such as cigarettes, food, and tools. According to Weinstein (1983), the goods were overpriced by the seringalistas to extract larger profits from the seringueiros work. Barham and Coomes (1994), on the other hand, argue that the structure of the market in the Amazon was less closed and that independent traders would travel around the basin in small boats, willing to exchange goods for rubber. Poor monitoring by employers and an absent state facilitated these under-the-counter transactions, which allowed tappers to get better pay for their work.
From the ports, rubber was in the hands of mainly Brazilian, British and American exporters. Contrary to what Weinstein (1983) argued, Brazilian producers or local merchants from the interior could choose whether to send the rubber on consignment to a New York commission house, rather than selling it to a exporter in the Amazon (Shelley, 1918). Rubber was taken, like other commodities, to ports in Europe and the US to be distributed to the industries that bought large amounts of the product in the London or New York commodities exchanges. A large part of rubber produced was traded at these exchanges, but tire manufacturers and other large consumers also made direct purchases from the distributors in the country of origin.
Rubber Production in Southeast Asia
Seeds Smuggled from Brazil to Britain
The Hevea brasiliensis, the most important type of rubber tree, was an Amazonian species. This is why the countries of the Amazon basin were the main producers of rubber at the beginning of the international rubber trade. How, then, did British and Dutch colonies in Southeast Asia end up dominating the market? Brazil tried to prevent Hevea brasiliensis seeds from being exported, as the Brazilian government knew that by being the main producers of rubber, profits from rubber trading were insured. Protecting property rights in seeds proved a futile exercise. In 1876, the Englishman and aspiring author and rubber expert, Henry Wickham, smuggled 70,000 seeds to London, a feat for which he earned Brazil’s eternal opprobrium and an English knighthood. After experimenting with the seeds, 2,800 plants were raised at the Royal Botanical Gardens in London (Kew Gardens) and then shipped to Perideniya Gardens in Ceylon. In 1877 a case of 22 plants reached Singapore and were planted at the Singapore Botanical Garden. In the same year the first plant arrived in the Malay States. Since rubber trees needed between 6 to 8 years to be mature enough to yield good rubber, tapping began in the 1880s.
Scientific Research to Maximize Yields
In order to develop rubber extraction in the Malay States, more scientific intervention was needed. In 1888, H. N. Ridley was appointed director of the Singapore Botanical Garden and began experimenting with tapping methods. The final result of all the experimentations with different methods of tapping in Southeast Asia was the discovery of how to extract rubber in such a way that the tree would maintain a high yield for a long period of time. Rather than making a deep gouge with an axe on the rubber tree, as in Brazil, Southeast Asian tappers scraped the trunk of the tree by making a series of overlapped Y-shaped cuts with an axe, such that at the bottom there would be a canal ending in a collecting receptacle. According to Akers (1912), the tapping techniques in Asia insured the exploitation of the trees for longer periods, because the Brazilian technique scarred the tree’s bark and lowered yields over time.
Rapid Commercial Development and the Automobile Boom
Commercial planting in the Malay States began in 1895. The development of large-scale plantations was slow because of the lack of capital. Investors did not get interested in plantations until the prospects for rubber improved radically with the spectacular development of the automobile industry. By 1905, European capitalists were sufficiently interested in investing in large-scale plantations in Southeast Asia to plant some 38,000 acres of trees. Between 1905 and 1911 the annual increase was over 70,000 acres per year, and, by the end of 1911, the acreage in the Malay States reached 542,877 (Baxendale, 1913). The expansion of plantations was possible because of the sophistication in the organization of such enterprises. Joint stock companies were created to exploit the land grants and capital was raised through stock issues on the London Stock Exchange. The high returns during the first years (1906-1910) made investors ever more optimistic and capital flowed in large amounts. Plantations depended on a very disciplined system of labor and an intensive use of land.
Malaysia’s Advantages over Brazil
In addition to the intensive use of land, the production system in Malaysia had several economic advantages over that of Brazil. First, in the Malay States there was no specific tapping season, unlike Brazil where the rain did not allow tappers to collect rubber during six months of the year. Second, health conditions were better on the plantations, where rubber companies typically provided basic medical care and built infirmaries. In Brazil, by contrast, yellow fever and malaria made survival harder for rubber tappers who were dispersed in the forest and without even rudimentary medical attention. Finally, better living conditions and the support of the British and Dutch colonial authorities helped to attract Indian labor to the rubber plantations. Japanese and Chinese labor also immigrated to the plantations in Southeast Asia in response to relatively high wages (Baxendale, 1913).
Initially, demand for rubber was associated with specialized industrial components (belts and gaskets, etc.), consumer goods (golf balls, shoe soles, galoshes, etc.), and bicycle tires. Prior to the development of the automobile as a mass-marketed phenomenon, the Brazilian wild rubber industry was capable of meeting world demand and, furthermore, it was impossible for rubber producers to predict the scope and growth of the automobile industry prior to the 1900s. Thus, as Figure 3 indicates, growth in demand, as measured by U.K. imports, was not particularly rapid in the period 1880-1899. There was no reason to believe, in the early 1880s, that demand for rubber would explode as it did in the 1890s. Even as demand rose in the 1890s with the bicycle craze, the rate of increase was not beyond the capacity of wild rubber producers in Brazil and elsewhere (see figure 3). High rubber prices did not induce rapid increases in production or plantation development in the nineteenth century. In this context, Brazil developed a reasonably efficient industry based on its natural resource endowment and limited labor and capital sources.
In the first three decades of the twentieth century, major changes in both supply and demand created unprecedented uncertainty in rubber markets. On the supply side, Southeast Asian rubber plantations transformed the cost structure and capacity of the industry. On the demand side, and directly inducing plantation development, automobile production and associated demand for rubber exploded. Then, in the 1920s, competition and technological advance in tire production led to another shift in the market with profound consequences for rubber producers and tire manufacturers alike.
Rapid Price Fluctuations and Output Lags
Figure 1 shows the fluctuations of the Rubber Smoked Sheet type 1 (RSS1) price in London on an annual basis. The movements from 1906 to 1910 were very volatile on a monthly basis, as well, thus complicating forecasts for producers and making it hard for producers to decide how to react to market signals. Even though the information of prices and amounts in the markets were published every month in the major rubber journals, producers did not have a good idea of what was going to happen in the long run. If prices were high today, then they wanted to expand the area planted, but since it took from 6 to 8 years for trees to yield good rubber, they would have to wait to see the result of the expansion in production many years and price swings later. Since many producers reacted in the same way, periods of overproduction of rubber six to eight -odd years after a price rise were common. Overproduction meant low prices, but since investments were mostly sunk (the costs of preparing the land, planting the trees and bringing in the workers could not be recovered and these resources could not be easily shifted to other uses), the market tended to stay oversupplied for long periods of time.
In figure 1 we see the annual price of Malaysian rubber plotted over time.
The years 1905 and 1906 marked historic highs for rubber prices, only to be surpassed briefly in 1909 and 1910. The area planted in rubber throughout Asia grew from 15,000 acres in 1901 to 433,000 acres in 1907; these plantings matured circa 1913, and cultivated rubber surpassed Brazilian wild rubber in volume exported. The growth of the Asian rubber industry soon swamped Brazil’s market share and drove prices well below pre-Boom levels. After the major peak in prices of 1910, prices plummeted and followed a downward trend throughout the 1920s. By 1921, the bottom had dropped out of the market, and Malaysian rubber producers were induced by the British colonial authorities to enter into a scheme to restrict production. Plantations received export coupons that set quotas that limited the supply of rubber. The shortage of rubber did not affect prices until 1924 when the consumption passed the production of rubber and prices started to rise rapidly. This scheme had a short success because competition from the Dutch plantations in southeast Asia and others drove prices down by 1926. The plan was officially ended in 1928.
Automobiles’ Impact on Rubber Demand
In order to understand the boom in rubber production, it is fundamental to look at the automobile industry. Cars had originally been adapted from horse-drawn carriages; some ran on wooden wheels, some on metal, some shod as it were in solid rubber. In any case, the ride at the speeds cars were soon capable of was impossible to bear. The pneumatic tire was quickly adopted from the bicycle, and the automobile tire industry was born -- soon to account for well over half of rubber company sales in the United States where the vast majority of automobiles were manufactured in the early years of the industry. The amount of rubber required to satisfy demand for automobile tires led first to a spike in rubber prices; second, it led to the development of rubber plantations in Asia.
The connection between automobiles, plantations, and the rubber tire industry was explicit and obvious to observers at the time. Harvey Firestone, son of the founder of the company, put it this way:
It was not until 1898 that any serious attention was paid to plantation development. Then came the automobile, and with it the awakening on the part of everybody that without rubber there could be no tires, and without tires there could be no automobiles. (Firestone, 1932, p. 41)
Thus the emergence of a strong consuming sector linked to the automobile was necessary. For instance, the average price of rubber from 1880-1884 was 401 pounds sterling per ton; from 1900 to 1904, when the first plantations were beginning to be set up, the average price was 459 pounds sterling per ton. Thus, Asian plantations were developed both in response to high rubber prices and to what everyone could see was an exponentially growing source of demand in automobiles. Previous consumers of rubber did not show the kind of dynamism needed to spur entry by plantations into the natural rubber market, even though prices were very high throughout most of second half of the nineteenth century.
Producers Need to Forecast Future Supply and Demand Conditions
Rubber producers made decisions about production and planting during the period 1900-1912 with the aim to reap windfall profits, instead of thinking about the long-run sustainability of their business. High prices were an incentive for all to increase production, but increasing production, through more acreage planted could mean a loss for everyone in the future (because too much supply could drive the prices down). Yet, current prices could not yield profits when investment decisions had to be made six or more years in advance, as was the case in plantation production: in order to invest in plantations, capital had to be able to predict future interactions in supply and demand. Demand, although high and apparently relatively price inelastic, was not entirely predictable. It was predictable enough, however, for planters to expand acreage in rubber in Asia at a dramatic rate. Planters were often uncertain as to the aggregate level of supply: new plantations were constantly coming into production; others were entering into decline or bankruptcy. Thus their investments could yield a lot in the short run, but if all the people reacted in the same way, prices were driven down and profits were low too. This is what happened in the 1920s, after all the acreage expansion of the first two decades of the century.
Demand Growth Unexpectedly Slows in the 1920s
Plantings between 1912 and 1916 were destined to come into production during a period in which growth in the automobile industry leveled off significantly owing to recession in 1920-21. Making maters worse for rubber producers, major advances in tire technology further controlled demand -- for example, the change from corded to balloon tires increased average tire tread mileage from 8,000 to 15,000 miles. The shift from corded to balloon tires decreased demand for natural rubber even as the automobile industry recovered from recession in the early 1920s. In addition, better design of tire casings circa 1920 led to the growth of the retreading industry, the result of which was further saving on rubber. Finally, better techniques in cotton weaving lowered friction and heat and further extended tire life. As rubber supplies increased and demand decreased and became more price inelastic, prices plummeted: neither demand nor price proved predictable over the long run and suppliers paid a stiff price for overextending themselves during the boom years. Rubber tire manufacturers suffered the same fate: competition and technology (which they themselves introduced) pushed prices downward and, at the same time, flattened demand (Allen, 1936).
Now, if one looks at the price of rubber and the rate of growth in demand as measured by imports in the 1920s, it is clear that the industry was over-invested in capacity. The consequences of technological change were dramatic for tire manufacturer profits as well as for rubber producers.
The natural rubber trade underwent several radical transformations over the period 1870 to 1930. First, prior to 1910, it was associated with high costs of production and high prices for final goods; most rubber was produced, during this period, by tapping rubber trees in the Amazon region of Brazil. After 1900, and especially after 1910, rubber was increasingly produced on low-cost plantations in Southeast Asia. The price of rubber fell with plantation development and, at the same time, the volume of rubber demanded by car tire manufacturers expanded dramatically. Uncertainty, in terms of both supply and demand, (often driven by changing tire technology) meant that natural rubber producers and tire manufacturers both experienced great volatility in returns. The overall evolution of the natural rubber trade and the related tire manufacture industry was toward large volume, low-cost production in an internationally competitive environment marked by commodity price volatility and declining levels of profit as the industry matured.
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Allen, Hugh. The House of Goodyear. Akron: Superior Printing, 1936.
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Babcock, Glenn D. History of the United States Rubber Company. Indiana: Bureau of Business Research, 1966.
Barham, Bradford, and Oliver Coomes. "The Amazon Rubber Boom: Labor Control, Resistance, and Failed Plantation Development Revisited." Hispanic American Historical Review 74, no. 2 (1994): 231-57.
Barham, Bradford, and Oliver Coomes. Prosperity's Promise. The Amazon Rubber Boom and Distorted Economic Development. Boulder: Westview Press, 1996.
Barham, Bradford, and Oliver Coomes. "Wild Rubber: Industrial Organisation and the Microeconomics of Extraction during the Amazon Rubber Boom (1860-1920)." Hispanic American Historical Review 26, no. 1 (1994): 37-72.
Baxendale, Cyril. "The Plantation Rubber Industry." India Rubber World, 1 January 1913.
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Brazil. Instituto Brasileiro de Geografia e Estatística. Anuário Estatístico Do Brasil. Rio de Janeiro: Instituto Brasileiro de Geografia e Estatística, 1940.
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Shelley, Miguel. "Financing Rubber in Brazil." India Rubber World, 1 July 1918.
Weinstein, Barbara. The Amazon Rubber Boom, 1850-1920. Stanford: Stanford University Press, 1983.
 Rubber taping in the Amazon basin is described in Weinstein (1983), Barham and Coomes (1994), Stanfield (1998), and in several articles published in India Rubber World, the main journal on rubber trading. See, for example, the explanation of tapping in the October 1, 1910 issue, or “The Present and Future of the Native Havea Rubber Industry” in the January 1, 1913 issue. For a detailed analysis of the rubber industry by region in Brazil by contemporary observers, see Schurz et al (1925).
 Newspapers such as The Economist or the London Times included sections on rubber trading, such as weekly or monthly reports of the market conditions, prices and other information. For the dealings between tire manufacturers and distributors in Brazil and Malaysia see Firestone (1932).
 Using cross-correlations of production and prices, we found that changes in production at time t were correlated with price changes in t-6 and t-8 (years). This is only weak evidence because these correlations are not statistically significant.
 Drabble (1973), 213, 220. The expansion in acreage was accompanied by a boom in company formation.
 Drabble (1973), 192-199. This was the so-called Stevenson Committee restriction, which lasted from 1922 to 1926. This plan basically limited the amount of rubber each planter could export assigning quotas through coupons.
 Pneumatic tires were first adapted to automobiles in 1896; Dunlop’s pneumatic bicycle tire was introduced in 1888. The great advantage of these tires over solid rubber was that they generated far less friction, extending tread life, and, of course, cushioned the ride and allowed for higher speeds.
 Early histories of the rubber industry tended to blame Brazilian “monopolists” for holding up supply and reaping windfall profits, see, e.g., Allen (1936), 116-117. In fact, rubber production in Brazil was far from monopolistic; other reasons account for supply inelasticity.
 Blackford and Kerr (1996), p. 88.
 The so-called “supertwist” weave allowed for the manufacture of larger, more durable tires, especially for trucks. Allen (1936), pp. 215-216.
 Allen (1936), p. 320.