-  Representatives from the three largest rubber producers (70% of global production) - Thailand, Indonesia and Malaysia (the International Tripartite Council) - began their 3-day regional rubber seminar (Asean Plus 2013 Rubber Conference) yesterday to discuss ways to support natural rubber prices.

-  YTD, latex prices are down 2.1% despite the onset of the wintering season. Historically, prices in the first quarter of the year jumped by ~23%. With the dry season in Thailand (1/3 of world production) coming to an end and higher yields from massive replanting in 2008 to 2011, upside potential of rubber prices are expected to be capped.

-  Attempting to stem the decline, the Thai government had announced a 60-day extension on export reduction to the end of May following the March expiry of the previous Tripartite agreement. We believe the other two nations will join Thailand’s move and a scheme similar to that announced in October 2012 will be implemented.

-  At the conference, Thailand’s Deputy Farm Minister Yuttapong Charasathien also said that the country is working on measures to lift local demand by encouraging the set up of new processing plants, tyres and glove production facilities. We do not view this as a threat to the domestic glove manufacturers as Thailand at present only commands 18% of global glove market share vs Malaysia’s 63%.

-  This month, rubber fell into a bear market following signs of production outstripping demand. According to RCMA Commodities Asia Group, the surplus will expand 62% to 353,000 tons this year, with inventories rising 24% to a record 1.8 million tons. The last high was 1.7 million tons recorded at the end of 2009.

-  Global rubber consumption is expected to remain lacklustre in 2013 weighed down by the European debt crisis and weak global automotive market. As it is, China, the world’s largest rubber consumer (34% of global demand) has said that its tire output may only rise 4% this year in contrast to the average rate of 8.4% a year between 2007 and 2011. In addition, North American truck build slots for 2Q13 remain 41% unfilled (2Q12: 28%).

-  China’s rubber inventories are currently slightly off its peak of 358,300 tons achieved on March 15. Authorities at Qingdao, its main import hub, had ordered local warehouses to clear its stocks within 10 days for safety reasons. This had further exacerbated the fall in rubber prices.

-  We maintain our OVERWEIGHT stance on the rubber glove sector at present as we await the outcome of the dialogue. Healthy global glove consumption (10%-15%, excluding the expected exponential growth should the H7N9 become a pandemic) and favourable operating environment (raw materials make up 55% of total production costs) will translate into another good year for the rubber glove players.

Source: AmeSecurities