Sri Lanka’s rubber industry at crossroads amid economic and structural stress

Sri Lanka’s rubber industry entered 2025 under mounting pressure from weakening global demand and policy uncertainty to persistent disease outbreaks, labour shortages and rising production costs. 

By 2026, a further 15 percent wage increase intensified existing cost pressures, raising concerns about the long-term viability of rubber plantations.

While the sector has long played a strategic role in export earnings and domestic manufacturing, industry leaders now warn that without timely intervention, rubber risks becoming economically unviable across large parts of the country.

Export performance in 2025 reflected these strains. Rubber-based export earnings declined to around US$ 945 million, down from approximately US$ 1.01 billion in 2024, marking a contraction of about 5-6 percent. The impact was particularly visible in tyre and value-added manufacturing segments, especially due to tariffs imposed by the United States, Sri Lanka’s largest single rubber export market, accounting for roughly one-third of total rubber export revenue.

Sri Lanka’s rubber sector operates in a highly competitive global market where producers in countries such as Thailand and Vietnam, along with emerging producers in Africa, enjoy lower production costs and larger economies of scale. India, meanwhile, is aggressively expanding its rubber-based manufacturing capacity. While Sri Lanka continues to command a premium for niche products such as crepe rubber and high-quality centrifuged latex, these advantages are narrowing as competitors scale up production and integrate supply chains more efficiently.

A major domestic shock came with the removal of the Simplified VAT (SVAT) system, which significantly affected producer prices. Under the previous system, VAT obligations were settled via a credit mechanism, avoiding large upfront cash outflows. With its removal, buyers are now required to pay 18 percent VAT upfront, creating liquidity constraints across the value chain.

In practice, this has led to price suppression at auctions. In January alone, top-grade crepe rubber (1X) failed to clear at all weekly auctions, with bids falling as low as Rs. 800 per kilogram, compared to prices exceeding Rs. 1,300 prior to the SVAT removal. Although some buyers later purchased rubber privately at higher prices, the absence of auction clearing has distorted price discovery and weakened Sri Lanka’s credibility in international pricing benchmarks.

At the same time, rising wages, higher energy costs and increased compliance burdens have pushed production costs upward, squeezing margins across plantations and downstream manufacturers alike.