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Friday, May 23, 2014

Rubber Gloves - NR prices to remain favourably low NEUTRAL


- Recent news reports and comments from industry experts indicate that natural rubber (NR) latex prices are expected to remain depressed in the short term and possibly through to 2016.

- We gather that global output is set to surpass consumption for the fourth consecutive year in 2014 as supply will be boosted by the maturing plantations in Cambodia and Vietnam, following replanting activities in 2006-2008. World stockpiles at key import countries remain elevated, with inventories in Qingdao - China’s main import hub - holding up at a high of 270,000 tonnes (as of May 16).

- An additional overhang comes from the Thai government’s proposal to pare down its domestic reserves of ~200,000 tonnes, which it had accumulated, when it launched a US$1bil rubber purchase programme to help stabilise the commodity’s prices. Rubber prices had plunged by ~6% during the week the plan was announced. However, in light of the ongoing political tensions in the country, the plan has been put on hold with further details of the sale only to be known later this month. We understand that there have been no disruptions of NR exports/supply to the glove manufacturers thus far.

- Meanwhile, consumption of NR is set to be limited by concerns of a slowdown in China, which is the largest consumer of NR. The recent anti-China riots in Vietnam - currently the third largest producer of NR after Thailand and Indonesia - will only serve to further reduce imports.

- A silver lining would be the China Association of Automobile Manufacturers forecast of a 10% rise in automotive sales. However, as noted by Bloomberg, the current divergence in global vehicle sales volume and rubber prices is a rare occurrence.

- The International Rubber Consortium (IRCo) is still hopeful of some upside to prices as the drought this year is expected to be quite severe, with El Nino expected to come in the second half. The latter’s impact is inconclusive as during the 1982-1983 and 1987-1988 events, no significant decline in production and prices were observed but during the 1997-1998 episode, the IRSG had noted a slowdown in output growth in 1997 to 0.4% from 6% in 1996.

- YTD, NR prices have slipped by 14% to RM4.61/kg. MoM, there have been declines in both April (-3.3%) and May (-4.8%) despite the onset of the wintering season (from February to May), which is when prices are highest seasonally.

- While low NR prices are favourable to the rubber glove manufacturers, we are not anticipating significant uptick in margins ahead as we expect prices to remain range-bound at ~RM5.00/kg. Besides, their product mixes now include a growing portion of nitrile gloves.

- All in all, we are maintaining our NEUTRAL recommendation on the sector, with Kossan (FV: RM5.00/share) being our only BUY. We foresee the manufacturers’ earnings ahead to lack lustre as margins will be pressured by cost headwinds and intensifying competition.

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