- The press recently reported that the Malaysian government plans to use 10% of its natural rubber latex output for roadbuilding from 2016. According to Works Minister Fadillah Yusof, the rubberised roads will be cheaper to build and maintain and will also last longer.

- A similar proposal had been made by the Thai government last year. Back in August 2014, it announced plans to increase the domestic consumption of rubber (e.g. in construction of infrastructure) from 14% to 20% instead of engaging in costly market buybacks (e.g. in 2012) to stabilise prices.

- The moves are attempts by the respective governments to support the price of the commodity following a prolonged supply glut. The Association of Natural Rubber Producing Countries (ANRPC) expects the glut to continue in 2015 at 10,000 mt although The Rubber Economist projects a fall in global stockpiles, which peaked at 3 mil mt in 2014.

- Thailand is the world’s largest producer of rubber followed by Indonesia and Malaysia (collectively ~70% of world output). However, Vietnam’s (which recently became the fourth member of the International Tripartite Rubber Council) and Cambodia’s exports are on the rise in view of their maturing plantations.

- We are neutral on this announcement as Malaysia’s share of rubber output is already on a downward trend and hence a reduction in its exports will not significantly impact global prices. More importantly, however, we note that the domestic rubber glove manufacturers primarily source their latex from Thailand.

- Rubber prices had rallied by 36% this year to reach a high of RM5.13/kg on 5 June on the back of concerns over the El Nino, which is expected to be severe in the second half. Its impact is however, inconclusive as during the 1982-1983 and 1987-1988 events, no significant decline in production and rise in 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.

- That said, we note that prices had reversed in the past weeks, falling 6% as demand – especially from China – slows and Thai rubber production rebounds by 30% to more than 200,000 tons a month in June and July after the low production periods of April and May.

- Maintain OVERWEIGHT call on sector as we believe that the current natural rubber latex price levels of ~RM5.00/kg remains palatable to the rubber glove manufacturers, and hence, we do not expect the recent increase in price to significantly dent their earnings. Besides, the margin expansions from the USD:RM rally (YTD: +7%) provide some buffer. Nitrile prices, meanwhile have remained rather stable.

Source: AmeSecurities Research - 26 Jun 2015