Rubber could lose some steam this year, but stay a cash cow

June 02 (LBO) – Overheated rubber prices are expected to settle down from its recent high spell, brokers say, but stocks with high exposure to rubber will still be the cash cow this year.

Top grades of crepe rubber, which makes up bulk of Sri Lanka’s rubber exports, is now selling at 395 rupees a kilo, over 175 rupees a kilo levels in May last year.

Our market can go up by another 10-15 rupees, but will settle down and remain around 350-375 rupees for the rest of the year,Damitha Perera, Director, Rubber Department at Forbes and Walker Commodity Brokers, told LBO on Friday.

 

With crepe being traded on the futures market ahead to August this year at 350-375 rupee levels, prices will remain at that at least until then, Perera said.

RSS grades of sheet rubber are selling at 225 rupees at the moment, but this is also expected to move up about a further ten rupees, before it settles down.

Sheet rubber is about 35 percent of the country’s total production, produced almost entirely by small holders. Demand is almost entirely locally driven, used up by domestic industries.

Crepe is about 35 percent of local production and liquid latex used to make gloves, about 30 percent, most of which is produced by plantation companies.

Sri Lanka produces 104.4 million kilos of rubber and the total area under cultivation is 116,000 hectares.

Some plantation companies are re-planting, turning over abandoned lands to rubber as the outlook for the year stabilises and prices show signs of slowing but staying high.

“We are hoping prices will remain at 200-300 rupee levels this year, so we have gone ahead with replanting of about 100 hectares this year,” an official with Richard Peiris owned Namunukula Plantations, told LBO.

Namunukula has 2,443 hectares under rubber, in addition to 2,800 hectares under tea. Last year, the company’s average price for rubber was 165 rupees a kilo.

Kotagala Plantations also has 844 hectares of immature rubber coming in to bearing over the next five to six years.

Stock Sale

Over the past two to three weeks, companies with a high exposure to rubber have seen a significant share price spike, on the back of brisk trading.

Share prices for stocks like Kegalle, Agalawatte and Kotagala plantations have gone up on average by 25 to 40 percent in the past month, Channa Amaratunga, Chief Investment Officer for Boston Asset Management, told LBO.

“Most of this is due to the acceleration in rubber prices.” But skyrocketing prices are expected to reflect fully in second quarter company results, after a slow first quarter.

Kotagala Plantations chalked up 592 million rupees in the last financial year at a National Sales Average (NSA) for rubber of 155 rupees.

“The current NSA is around 210 rupees, a 35 percent year on year growth and this is expected to reflect in Kotagala’s final year 2007 financials, which in turn will have a positive impact on the compan’s share price,” analysts with DFCC stockbrokers said.

Kotagala Plantations is currently trading at 21 rupees a share and has 4231 hectares under rubber, producing 3.8 million kilos of rubber, as against 2634 hectares under tea.

But the “easy money” of the past few weeks is probably over in plantation stocks, Amaratunga said, as investors now look beyond the speculative element to company dynamics, like exposure to loss making tea or high management fees.

Global Meltdown

Global prices for rubber have reached a 22 year high, doubling since last year on tight supplies from rubber producing countries due to rain and surging demand from China.

High prices of synthetic rubber, pegged to soaring costs of crude, have also lowered its attractiveness as a substitute for natural rubber.

“Globally, prices have reached a peak and we are seeing a downturn from today because end users cannot absorb this anymore. -“China’s intake increased by 30% this year .However they too were silent this week due to unaffordable prices”,” Perera from Forbes Commodity Brokers, said.

Overheated natural rubber prices could also see a slow down as it catches up to synthetic rubber, and industries switch to the alternative.

(Corrected)

-Zainab Ibrahim-