Friday, November 18, 2011

OSK Research maintains overweight on rubber glove sector

KUALA LUMPUR (Nov 18): OSK Research is maintaining its Overweight stance on the rubber gloves sector.

It said on Friday that amid expectations of moves to set a floor price, latex has dropped by about RM4.50/kg from its peak price, and has only RM2.50/kg to fall before reaching its low at RM4/kg, which was the price before the H1N1 outbreak (assuming there is no floor price).

'In light of this, we believe that customers will start to stock up on gloves from now on before the wintering of rubber trees sets in come 1H12. We maintain Overweight on the rubber glove sector,' it said.

OSK Research said Thailand's Deputy Agriculture Minister, Pornsak Jarernprasert said that the government plans to intervene in the market to keep the rubber price stable by setting a minimum rubber export price of US$3/kg.

The world's top three rubber producing countries of Thailand, Indonesia and Malaysia are expected to meet this week to discuss the matter.

The research house said assuming the floor price for hard rubber is set at US$3/kg at a US$/ringgit rate of 3.10 and a latex rubber concentration of 60% (with the balance 40% made up of water), the expected floor price would be about RM5.60/kg (US$3/kg x 3.10 x 60%).

'Nevertheless, we believe there is a 50% possibility of the price going either way from the current RM6.60/kg.

'Although we expect some upward bias due to the recent sharp drop in latex price, this would still depend on the outcome of the upcoming officials' meeting as well as the extent of price speculation on this commodity,' it said.

OSK Research said over the longer term, it continues to believe that latex price will fall because fundamentally, the demand for latex has been anaemic.

The factors are that demand growth is no longer as hot as before because rubber glove manufacturers are gradually shifting to a higher portion of nitrile gloves and global demand is currently not as strong as in 2009/2010 when there was a H1N1 pandemic.

Secondly, the automotive sector has suffered a string of setbacks as the global economic recovery is faltering and the severe flooding in Thailand has caused serious disruptions in many auto manufacturers' operations.

All these have resulted in weaker demand for hard rubber, which is used to produce tyres.


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