(Yicai Global) Sept.13 -- Hainan, China's main rubber-producing province, has been subject to significant fluctuations in the commodity's price over recent years. The province is home to 540,000 hectares of natural rubber plantations that yield about 420,000 tons of dried rubber every year.

A slump in rubber prices in July last year led to operations idling at more than 60 percent of private plantations. The price then rebounded in the following several months and peaked at CNY22,000 (USD3,370) per ton in February. However, prices then took another dive shortly after and currently stand at CNY12,000, down almost 50 percent.

Farmers planted rubber trees in large quantities when the price was high six years ago. These trees are now in their prime, but harvests have been reduced due to the commodity's price, with some plantations even left completely unattended.

Annual rubber demand in China is over five million tons, but production has fallen to less than 800,000 tons, leading to a shortfall. Rubber output must increase, but farmers should focus on high-end raw material products such as military rubber, said Zheng Wenrong, secretary-general at the China Natural Rubber Association.

Some 11.6 million tons of natural rubber were produced worldwide last year, while demand reached 12.5 million tons, data from the International Rubber Study Group show. The total rubber planting area has risen substantially in Southeast Asia over recent years and sales have now peaked. Market supply will likely grow steadily over the next three years.

The consensus among market insiders is, given the steady increase in supply and uncertainties over demand growth, that the trend in the rubber price will largely depend on how optimistic the market is about economic growth.

China Hainan Rubber Industry Group Co. [SHA:601118] has enhanced its existing trading models this year by combining insurance and futures products and strengthening risk resistance in a bid to cope with the impact of price fluctuations.

"The company introduced a risk hedge mechanism, and our largest insurance policy in China is worth CNY134 million (USD25.5 million)," said Li Baoyou, president of the listed firm.