Market on Dec 27: Rubber ends flat on holiday note

Market on Dec 27: Rubber ends flat on holiday note
December 27, 2011





MUMBAI, DEC. 27:

Spot rubber closed unchanged on Tuesday. According to market circles, there were neither buyers nor sellers in the market and most of the traders were still in a holiday mood in between Christmas and the New Year. The trend was partially mixed as RSS 5 slipped marginally amidst scattered transactions.

Stocks in NMCE accredited warehouses have been on the rise since last two weeks, reports said. The stocks fell to its lowest level during this year on 1st December. In the international markets activities were slowing down ahead of the New Year holidays and celebrations.

Sheet rubber finished steady at Rs 200 a kg according to traders. The grade slipped to Rs 200 (200.50) a kg both at Kottayam and Kochi as reported by the Rubber Board.

The January series closed at Rs 203.10 (203.88), February at Rs 205.70 (206.06), March at Rs 208.65 (209), April at Rs 214.50 (214.40), May at Rs 214 (214.12) and June at Rs 212.05 (213) a kg for RSS 4 on National Multi Commodity Exchange (NMCE).






Threat of latex price hike
Written by HMH | December 28, 2011 | 0 |





Sustainability of raw materials key to glovemakers’ margin recovery

THE rubber glove industry might be hit by a rise in latex price soon, said research analysts who maintained their “neutral” stance on the sector.

The main risk for glovemakers was higher rubber prices which accounted for 65% to 70% of costs, said CIMB Research.

Analysts opined that the current low latex price was unsustainable as rubber production was likely to be reduced due to the monsoon season as well as measures to shore up rubber prices by Thailand, Indonesia and Malaysia (which together account for 70% of the world’s rubber production).

RHB Research Institute noted that latex prices had gradually strengthened to RM6.88 per kg.

Kenanga Research’s sensitivity analysis showed that for every 1% rise in latex price, earnings would fall by 3% for Kossan Rubber Industries Bhd and Supermax Corp Bhd, both of which have a slightly balanced mix (of natural rubber and nitrile gloves), and a higher 9% fall for Top Glove Corp Bhd, which is predominantly a natural rubber glove player.

However, recent news reports have highlighted that rubber prices might decline if China, the world’s largest rubber consumer, sees slower growth in its economy and motor vehicle sales next year.

It should be noted that for the first 11 months of this year, China auto sales stood at 16.8 million units, rising only 2.56% from a year earlier, according to the China Association of Automobile Manufacturers.

To put this into perspective, Chinese auto sales saw a 34% year-on-year increase in the previous corresponding period, which was reflective of the stunning pace of growth that China’s motor vehicle industry had seen in the past few years.

China watchers had said the world’s second biggest economy was expected to see a slowdown in its growth momentum to 8.5% next year, which would be lowest for over a decade, due to largely to weakened external demand and continued economic uncertainty in Europe.

Kenanga Research noted that there could be a price war in the nitrile glove segment as new production capacity kicked in next year. “We believe that nitrile glove makers would reduce prices to gain market share. This poses a threat to Hartalega Holdings Bhd, which has a 90% share in the nitrile glove segment.”

RHB Research concurred, saying in a report that downward pressure on selling prices of nitrile gloves would affect manufacturers such as Hartalega and Kossan over the longer term.

Meanwhile, glovemakers are also not expected to continue to benefit over the longer term, from the recent appreciation of the greenback against the ringgit.

Kenanga Research said glove players had their earnings enhanced from 4% to 9% for every 1% appreciation in the dollar.

RHB Research believed the strengthening of the US dollar is just temporary, on the back of a reversal in capital flow.

“As the outflow normalises, we expect the ringgit to strengthen to around RM3 against the greenback fundamentally, and further to the RM2.80 to RM2.90 range over the longer term,” said RHB Research.

Earnings rebound

Meanwhile, CIMB Research said glovemakers’ earnings would rebound in the financial year 2012 due to improved utilisation and moderating costs.

“We forecast a two-year CAGR (compound annual growth rate) of 10% to 20% on the back of a 12.4% annual capacity growth until 2013, cost savings due to higher contribution from nitrile (an alternative to latex gloves) and improved utilisation rates as glovemakers switch to the more affordable nitrile.”

The research house noted that nitrile’s cost of production was 25% lower than natural rubber. Also, nitrile’s price is more stable as it is quoted monthly, and glovemakers can pass on costs more effectively.

However, CIMB Research also maintained a “neutral” stance on the sector as there were risks of rubber prices exceeding forecasts and intensifying competition.

HwangDBS Vickers Research also said the key to margin recovery for glove makers was the sustainability of raw material prices.

The potential impact of the rise in energy costs is not expected to have a significant impact on earnings, as electricity and natural gas costs only account for about 3%-4% and 6%-7% of total operating costs respectively, according to RHB Research. “We expect the manufacturers to pass on the cost increase to customers.”

Kenanga Research said it was expecting some stock trading opportunities in the first quarter of next year due to the anticipation of stronger margins from the glove players on the current lower latex price and the timing difference from the appreciating US dollar.

CIMB Research said the risk of higher rubber prices was partially accounted for in its target stock prices for the sector’s players, as its FY12-13 rubber price forecast was 20% above the spot price.

CIMB Research said its top stock pick was Hartalega, which was building its sixth glove plant and upgrading existing plants to enhance capacity by an additional 4.2 billion pieces of gloves. “Overall, by end-FY13, Hartalega will have an annual capacity of 10.7 billion pieces of gloves.”

Also, Hartalega’s push into China has tremendous potential, as per capita glove consumption in the country is only 2.2 pieces annually compared with 100 in the United States and 50 in Europe.

CIMB Research kept its “outperform” call on Hartalega, with a target price of RM8.44, which was pegged to a forward price-to-earnings ratio (P/E) of 11.75 times.

The research house also kept its “outperform” call on Supermax, with a target price of RM4.38, based on a 9.8 times forward P/E.

It noted that Supermax has a focus on the dental market (which accounts for 47% of group sales) as the number two player with a 9.2% market share in the United States.

Supermax will also build two new plants in Klang that will add capacity of 3.9 billion gloves per annum by end-FY13, giving it a total annual capacity of 25 billion gloves.

Supermax is likely to complete its one-for-one bonus issue before the end of next month.

CIMB Research also noted that this will add 340 million shares, enhance the stock’s trading liquidity and allow for better price discovery.

Kenanga Research said it preferred Kossan (“outperform” with a target price of RM3.64) for its well balanced mix in nitrile and latex gloves. It maintains the recommendations on Hartalega (“outperform”; RM6.43), Top Glove (“underperform”; RM3.74), Adventa (“market perform”; RM1.41) and Supermax (market perform; RM2.94).






Rubber prices drop but little respite for tyre makers
Written by HMH | December 28, 2011 | 0 |







Rubber prices have fallen over the last few months, which should bring a cheer among tyre manufacturers. But that is unlikely for at least the third and fourth quarters, as the recent rupee depreciation has increased import costs, thus limiting the gains if any from falling cost of the key raw material.

Price of rubber has fallen to around Rs 200 a kg from Rs 240 in April. Natural rubber accounts for 44% of total raw material costs of tyre makers. So a drop in its price should be good news as it will boost margins. However, gains will be limited this time around.

“There will be very small improvement in margins, at best 20-30 basis points sequentially. Tyre companies import a lot of rubber, so the depreciation in rupee will hurt,” Vineet Hetamasaria, vice president – research at brokerage Pinc told moneycontrol.com.

About 50% of the tyre industry’s raw materials, including rubber, are imported. So the rupee depreciation makes importing expensive. Apollo Tyres , for instance, is expecting a better third quarter, compared with July-September, but margins will be under pressure still.

Rubber prices may have fallen to Rs 200 a kg, but they are still much higher than the Rs 110 a kg two years ago, according to Neeraj Kanwar, vice chairman and MD of Apollo Tyres.

In July-September, the company’s raw material cost was up 57% year-on-year. Other tyre makers too saw a surge in input costs. MRF ’s raw material costs rose 43% for the fiscal year ended September 30.

“As far as Apollo is concerned, in Q3 we will have better profit margins, though there is still challenge on bottomline and margins are still very much under pressure,” he told CNBC-TV18 recently.

On the volume front too there is not much good news. Automobile sales accelerated 30% in 2010-11, which prompted many tyre makers to expand capacities to cater to the strong demand. But high fuel prices, and expensive loans have hit auto sales, especially passenger cars, where volumes are down 3.5% year-on-year over April-November.

“On the volume front things are not looking good as car sales remain subdued and that will affect tyre sales too,” Hetamasaria said.

Although commercial vehicle sales have maintained a steady uptick, here too tyre sales remain slow due to a drop in after-market demand, analysts say. The mining ban in Karnataka and Goa among other regions too has hurt tyre sales in the CV segment.

“Car and truck tyre dealers in northern and western India largely affirm that medium and heavy commercial vehicle tyre off-take remains sluggish, while the demand for two-wheelers and LCVs has held up so far. Overall, dealers expect growth in 2011-12 to be at a subdued 10%,” said Rohan Korde and Nirav Bhatt of Anand Rathi Research.

Production too has been slow due to sluggish sales. Tyre production in India rose only 10% year-on-year in April-September, according to Automotive Tyre Manufacturers’ Association data.

Due to the recent sluggish demand tyre manufacturers haven’t been able to take any price hikes over the last few months, a move that could have eased some pressures.

In the last three months, there have been no price increases, nor have the dealers provided any discounts, point out the Anand Rathi analysts.

Tyre stocks were mixed on Wednesday. While TVS Srichakra and Ceat were up 0.5-1%, MRF , Apollo, JK Tyre and Goodyear India were down 0.5-2%. Since April this year, JK Tyre and Ceat have been among the worst performers among its peers, down 33%, 30% respectively. Apollo Tyres is up 12.7% and MRF has risen 8.5%.

Pinc and Anand Rathi Research have “buy” rating on Apollo Tyres.