INDUSTRY OUTLOOK: NEGATIVE
TRIS Rating holds a “negative” outlook for natural rubber (NR) processor industry in Thailand during 2019-2020. We expect the worldwide NR market to remain in oversupply over the next two years. NR consumption is expected to soften due to a slowdown in the global economy and the ongoing trade war between China and the United States (US). Consequently, NR prices will weaken during 2019-2020. Apart from the low prices, Thai NR exporters are being hit by external headwinds and the appreciation of the Thai baht. We expect the profit of the NR processor rated by TRIS Rating to weaken in 2019, before gradually improving in the following years.
KEY FACTORS
Excess supply continues
TRIS Rating expects global NR usage to fall behind NR production during 2019-2021, which will continue to exert downward pressure on NR prices. The International Rubber Study Group (IRSG) predicts that NR production is likely to grow around 2% during 2019-2020, lower than 5% during 2017-2018. The slower growth rate is mainly due to the discouraging low NR prices. The low-return crops have caused rubber growers to put off new plantings, delay replanting schedules, or switch to more profitable crops. However, NR output in 2020 may drop as a result of the outbreak of a fungal disease in the major producing countries, namely Thailand, Indonesia, and Malaysia. The Rubber Authority of Thailand (RAOT) has predicted that NR output could decrease by nearly 1 million tonnes in 2020.
NR usage will dampen during 2019-2020 as a result of the economic slowdown and the ongoing trade disputes between China and the US. The IRSG anticipates that global NR usage is likely to expand by about 1.9% during the period. Over 70% of total consumption comes from the tire industry. The remaining NR usage is from non-tire consumers, particularly NR glove producers. Growth of the automobile industry has decelerated in 2019 as a result of the trade war, which has led to a slower growth in demand for the tire industry.
Weakening trend of NR prices
NR prices in 2019-2020 are expected to stay low owing to persistent excess supply and softening demand. The average price of technically specified rubber type 20 (STR20; F.O.B Bangkok) slipped to Bt39.80 per kilogram (kg) in November 2019 from Bt41.71/kg in January 2019. The average STR20 price spiked during May and June 2019 owing to low season of NR output during the raining season. Moreover, TRIS Rating believes that the export curb implemented by the International Tripartite Rubber Council (ITRC) could decrease market supply and support NR prices in the short term. The ITRC, which comprises Thailand, Indonesia, and Malaysia, agreed to cut exports by around 240,000 tonnes during the period of May to September 2019.
Thailand’s NR exporters face trade headwinds
In 2019, Thai NR exporters were hit by the trade war, worldwide economic slowdown, and the appreciation of the Thai baht. China is the world’s largest NR consumers and the biggest market for Thailand’s NR exports. In the first 10 months of 2019, NR exports dropped to 2.65 million tonnes, down by 9.8% year-on-year (y-o-y). Exports plummeted in almost all markets, particularly China (-18.4%) and Malaysia (-11.4%).
However, a drop in NR exports may be partly offset by NR used in the domestic market. Some Chinese tire manufacturers have relocated their production bases to Thailand in order to avoid the impacts of the trade war.
FINANCIAL HIGHLIGHTS
Volatile earnings and margin
NR processors experience volatile revenues and profitability because NR prices and exchange rate fluctuate widely. The aggregate operating income before depreciation and amortization (including gains and losses from derivatives instruments) of three NR processors listed on the Stock Exchange of Thailand (SET) ranged from Bt969 million to Bt7.06 billion during 2014-2018. The average operating margin of listed NR processors also fluctuated, ranging from 1.06% to 7.73% during the same period.
The economic slowdown and impacts of the trade war have led to a slower growth in NR consumption and lower margins of the operators. In the first nine months of 2019, the aggregate operating profits fell to Bt3 billion. The average operating margin slipped to 4.96%.
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