- 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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