- According to news reports last week, the International Rubber Consortium (IRCo) is advising trade associations in the International Tripartite Rubber Council (ITRC) countries to not sell natural rubber at the present “unreasonably low” prices. The decision comes after its recent meeting to assess the current market situation.

- YTD, natural rubber (NR) prices are down by ~14%. The global benchmark in Tokyo entered a bear market last month (a rare occasion at this time of the year) following:- (1) increasing signs of a slowdown in China (~35% of global rubber demand); (2) swelling stockpiles at Qingdao (+8% MoM in January); and (3) higher expected rubber output.

- IRCo, which represents the major rubber producers - Thailand, Malaysia and Indonesia - said that contrary to press reports, inventories in these countries are currently low and may decline further in view of the upcoming wintering season (from February to May).

- With the drought this year expected to be quite severe and the possibility of a supply disruption given the current political protests in Thailand, the group is optimistic of some upside to rubber prices. If, however, no green shoots are seen by its next meeting at end-February, the group may resort to collectively limiting exports, restricting tapping or

purchasing rubber directly from farmers to shore up prices.

- Recall that back in August 2012, ITRC had entered into an agreement to address the fall in NR prices by reducing total exports by 300,000 tonnes and cut aging trees until March 2013. The impact was short-lived as prices declined by 9% in November 2012 after gaining 5% in October 2012. Recognising this, IRCo will also propose a “Supply Management Scheme” as another method to ensure long-term NR price stability.

- All in all, the depressed raw material prices would be a boon for the rubber gloves industry. We believe that soft input costs coupled with the trend towards thinner gloves will not only lead to lower glove prices – thus, spurring demand (2014: +10%) – but it would also result in margin expansion for the rubber glove players.

- The largest gainers would undoubtedly be those with product mix tilted toward NR gloves, ore so given that there may be a slowdown in the switching momentum from nitrile to NR gloves following the reversal in input price trends. Nitrile is now trading at a premium to latex, which is against the norm of the past 2 years.

- No change to our forecasts and calls. We maintain our OVERWEIGHT recommendation on the sector and reaffirm our BUY ratings on Top Glove Corp (RM7.08/share) and Kossan Rubber Industries (RM5.05/share), while keeping Supermax Corp (RM2.65/share) and Hartalega Holdings (RM6.50/share) as HOLDs.

Source: AmeSecurities