Industry Research - Natural Rubber Industry

Tightened natural rubber supply

Persistently low natural rubber (NR) prices continue to pressure producers to limit expansion plans. A drop in new planting activity since 2013 has led to a tightened NR supply to the foreseeable future. Production in 2016 rose marginally to 12.4 million tonnes, up by 1.1%. NR usage increased from 12.1 million tonnes in 2015 to 12.6 million tonnes in 2016. NR production grew at a slower pace, easing the existing oversupply situation.

According to the International Rubber Study Group (IRSG), production in 2017 and 2018 is expected to grow to 12.9 million tonnes and 13.4 million tonnes, respectively. An increase in production is forecast to be in line with increasing demand for NR usage. NR usage is forecast to reach 12.8 million tonnes in 2017 and 13.4 million tonnes in 2018. Recovery in the automobile industry and a rebound in the world economy will support higher NR usage.

NR price recovery

NR prices in Thailand recovered due to easing of the oversupply situation. The average price of ribbed smoked sheet grade 3 (RSS3; F.O.B Bangkok) rose from Bt54.18 per kilogram (kg) in 2015 to Bt58.16/kg in 2016, up 7.3%. The average price for RSS3 reached a peak at Bt96.29/kg in February 2017, as heavy rain early in year caused flooding in some producing areas in Thailand. The average price of RSS3 decreased gradually to Bt55.62/kg in October 2017. However, the average price of NR in 2017 is still expected to be higher than the 2016 level.

Thailand as global NR supplier

Thailand remains the world’s largest NR producer and exporter. Generally, production in Thailand comprised about 36% of total NR production worldwide. NR production in Thailand slightly declined to 4.5 million tonnes in 2016, due to a drought. According to IRSG, production in the first half of 2017 rose to 2.1 million tonnes, up by 4.6% year-on-year (y-o-y). The Office of Agriculture Economics (OAE) forecasts that production in 2017 will increase owing to an expanded harvest area and recovering NR prices.

Over 80% of NR produced in Thailand is exported, mainly to China, Malaysia, Japan, the US, and South Korea. NR exports from Thailand declined from 3.7 million tonnes in 2015 to 3.5 million tonnes in 2016, dropping by 4.4%, primarily in exports to China, Japan, and South Korea. This drop was partially offset by gains in exports to the US. However, NR exports in the first nine months of 2017 showed an improvement. NR exports in the first nine months of 2017 (9M2017) were 2.6 million tonnes, a 2.2% rise. The rise was mainly in exports to China. TRIS Rating believes NR exports will rise in 2017, as higher demand for NR will come from recovery in the tire industry and the glove sector.

Rubber processor rated by TRIS Rating (as of November 2017)

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 2017 was 10.6%. As with most NR processors, STA’s earnings and cash flow fluctuate significantly due to industry cycles, fluctuation in foreign exchange, and a narrow margin of mid-stream NR producers.

NR price fluctuation hurt NR processors including STA. STA’s operating margin before depreciation (including a provision or reversal on the diminution in value of inventories and gains or losses from derivatives instruments) dropped significantly to 0.55% in 2016, compared with the 1.15%-3.17% during 2012-2015. The operating margin turned negative during the first half of 2017, tumbling to

-3.48%, compared with 3.25% in the first half of 2016. In addition, STA’s balance sheet was increasingly leveraged owing to higher working capital needs, continued capacity expansion, investments in plantation, and the recent investment in Sri Trang Gloves (Thailand) Co. Ltd. (STGT). The total debt to capitalization ratio was 67.07% at the end of June 2017, compared with 40%-49% during 2012-2015. The rising leverage and losses from derivative instruments noticeably weakened cash flow protection in 2016. As a result, TRIS Rating downgraded STA’s company rating from “A-” to “BBB+” due to weaker than expected debt serviceability.

Looking forward, STA’s performance is expected to gradually improve in 2018-2020 following increase in NR selling volumes, selling and administrative expenses (SG&A) reduction efforts, and improving glove operation. However, fluctuation in NR price remains the key challenges for the NR processors. TRIS Rating expects the NR processors to use hedging instruments prudently to mitigate NR price risk and foreign exchange risk. Liquidity is considered manageable despite challenging environment. Almost 70% of STA’s debts are short-term debts, which are utilized to finance inventory and accounts receivable. NR inventory is typically highly liquid and marketable. It can be easily liquidated to pay down debts.