An Anticipated Supply Shortage Accelerates Natural Rubber Orders and Shipments, Pushed Up Natural Rubber Prices

Stocks News Wednesday November 16, 2016 15:00 —TRIS News Release

World’snatural rubber production and usage

An oversupply of natural rubber (NR) has continued to ease since 2014. Worldwide NR production grew at a slower pace as the prolonged drops in NR prices caused producers to limit expansion plans. Production in 2015 was 12.3 million tonnes, up by 1.2% over the prior year. The slower than expected was due in part to the effect of the El Nino. Usage of NR decreased marginally in 2015, falling by 0.3% to 12.1 million tonnes. The decrease was mostly from drops in China, Japan, and India due to economic slowdowns.

According to the International Rubber Study Group (IRSG), production in 2016 and 2017 is expected to rise moderately to 12.4 and 12.8 million tonnes, respectively. The persistently low NR prices will keep pressuring producers to reduce production. NR usage is forecast to grow to 12.3 million tonnes in 2016 and 12.7 million tonnes in 2017. The rise is due to the increases in worldwide automobile production and a rebound in the global economy.

Natural rubber prices recover

NR prices stayed low for the last five years as a result of excess supply and the drops in oil prices. NR prices in Thailand were held down by these factors. The average price of ribbed smoked sheet grade 3 (RSS3; F.O.B Bangkok) slipped from Bt63.90 per kilogram (kg) in 2014 to Bt54.18/kg in 2015, a 15.2% drop. However, NR prices bottomed out in February 2016 and have recovered gradually. The average price for RSS3 rose from Bt45.24/kg in February 2016 to Bt59.11/kg in October 2016. An anticipated supply shortage accelerated NR orders and shipments, and pushed up NR prices. However, the average price of NR in 2016 is expected to stay low. NR prices are forecast to keep rising in 2017 as long as NR productions stay low.

Thailand remains the world’s largest NR supplier

In 2015, NR production in Thailand rose to 4.5 million tonnes, a 3.5% year-on-year (y-o-y) rise. Generally, NR production in Thailand represents around 36% of total NR production worldwide. According to the IRSG, NR production in the first half of 2016 increased marginally by 1.2% y-o-y. However, the Office of Agriculture Economics (OAE) expects NR production in 2016 to decline due to the supply management schemes implemented by the government and dry weather conditions.

Over 80% of the NR produced in Thailand is exported, mainly to China, Malaysia, Japan, the US, and South Korea. In 2015, NR exports from Thailand rose to 3.7 million tonnes, up by 7.2% y-o-y. The growth in NR exports is mostly due to increased shipments to China and the US. Rebounds in auto production in these two countries raise the prospects for NR exports. However, NR exports in the first nine months of 2016 declined slightly by 1.2% y-o-y. NR exports to China fell by 13% compared to the year earlier. The drop was a result of an anti-dumping investigation by the US into the Chinese tire industry. NR exports to Malaysia grew sharply in 2015,rising by 22.4%, as NR production in Malaysia fell. Auto production around the world in the first half of 2016 increased, particularly in China and the US. The recoveries in the automobile sector and tire industries will boost demand for NR.

Supply management schemes implemented by the government

The government is attempting to manage the supply of NR in order to raise NR prices. The government plans to cut down one million rubber trees this year, reducing NR production by approximately 200,000 tonnes. Moreover, in February 2016, the International Tripartite Rubber Council (ITRC) members, Thailand, Indonesia, and Malaysia, reached an agreement to reduce NR exports by 615,000 tonnes during March to August 2016 in an effort to drive up NR prices.

Rubber processor rated by TRIS Rating (as of November 2016)

Company Rating Outlook

Sri Trang Agro - Industry A- Stable

Sri Trang Agro-Industry PLC (STA) is one of the world’s leading processors and merchandisers of NR. The company’s market share in the global NR industry in the first half of 2016 was 11.6%. Similar to most NR processors, STA’s earnings and cash flow fluctuate significantly due to industry cycles. Earnings before interest, tax, depreciation, and amortization (EBITDA) ranged between Bt1,384-Bt4,945 million during 2011-2015. In the first half of 2016, EBITDA was Bt1,375 million, down by 18.3% y-o-y. EBITDA fell because profitability weakened in the first six months of 2016. However, STA’s performance is expected to improve in the remainder of the year as NR prices recover. Cash flow protection remained acceptable during the current industry down-turn. The EBITDA interest coverage ratio was 6.0 times in the first half of 2016, compared with 3.63 times in 2014 and 3.76 times in 2015. The Funds from operations (FFO) to total debt ratio declined to 7.07% (annualized, from the trailing 12 months) in the first half of 2016, compared with 14.06% in 2014 and 9.79% in2015. Liquidity is considered good as STA’s inventory of NR is typically highly liquid and marketable.

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