Wednesday 20 March 2013

Rubber Gloves - Tripartite to stretch NR price support? Overweight


- Yesterday, Bloomberg reported that the Thai government has proposed to continue its intervention in the rubber market by extending the reduction in rubber exports for a further year in order to support natural rubber (NR) prices.

- Recall, back in August 2012, the International Tripartite Council (Thailand, Indonesia and Malaysia) had entered into an agreement (Agreed Export Tonnage Scheme (AETS)) to address the fall in latex prices by reducing total exports by 300,000 tonnes and cut aging trees beginning October 2012. The export cuts were set to expire at the end of March 2013.

- According to the report, Thailand, the world’s largest rubber producer (35% of global production), is set to review its domestic rubber repurchase programme when it ends this month and refrain from planting new trees. The country also stressed that it does not plan to sell rubber from its stockpiles, which were accumulated after the government began a 45mil Baht programme to prop up NR prices for its farmers last year.

- Nonetheless, Thailand’s Deputy Farm Minister Yuttapong Charasathien was quoted as saying that the decision is not final as the three countries, which represent 70% of global latex output, are slated to meet in Phuket on April 10-12 to discuss the plan.

- Latex prices have declined by a significant 42% to RM6.10/kg wet since its peak of RM10.59/kg wet in February 2011. YTD, average monthly prices are up 6%. We deem this to be extremely mild given that historically, average YTD March prices had jumped by ~23% due to lower latex yields as the wintering season kicked in.

- While the AETS did have an impact on NR prices (+5 % MoM in October 2012), the measure was short-lived as NR prices declined by 9% MoM in November 2012. We believe other methods would be needed to ensure NR price stability in the longer term. Husni Bastari, chairman of the Rubber Association of Indonesia, said that NR producers should focus on managing supplies from rubber plantations instead of reducing shipments.

- In our opinion, NR prices will remain subdued this year as the IRSG has predicted an NR oversupply in 2013 of 179,000 tonnes. In addition, inventories in China have climbed to 113,803 tonnes, the highest since January 2012, while globally, inventories were at a 7-year high of 2 million tonnes at end-2012. This would be sufficient to fulfil the North American demand for 2 years. On the other hand, demand remains lacklustre as recovery in the global auto sector is still insignificant.

- We are neutral on this news given our higher average 2013 NR price assumption of RM6.50/kg wet and the development’s bark being louder than its bite. (Latex prices make up ~55% of glove manufacturer’s total production costs.) As such, we maintain our OVERWEIGHT stance on the rubber glove sector with our top BUYs being Top Glove (FV: RM6.50/share) and Kossan (RM4.50/share).

Source: AmeSecurities

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