Analyzing the Positive Spike in Japan's Rubber Sector

 |  Includes: CTB, GT, NWL
by: World Market Pulse

Japan has been in the news recently for all the wrong reasons after intervention by the Japanese monetary authorities for the first time in six years, selling yen to help the country's fragile economy. Although experts debated whether the Bank of Japan’s unilateral intervention to weaken the yen could actually reverse the trend of the currency’s appreciation, it now seems like it is having a soothing effect on the Japanese stock market, which has since been trading notably higher with investors indulging in some short-covering and bargain hunting.

Even as the country's blue-chip exporters were very optimistic after the government intervention, it's been the Pharmaceuticals, steel, non-ferrous metals, shipbuilding and rubber stocks that have been mostly up in positive territory since. Banking, automobile, communications and chemicals stocks are exhibiting a mixed trend. One of the most striking success stories emerging out of Japan has been the rise of the rubber sector as Key Tokyo rubber futures rose to five-month highs on Friday, supported by a firm oil market that underscored optimism about a global economic recovery, while a tight supply also helped improve investor sentiment. Japan's crude rubber inventories totaled 7,282 MT as of September 20, jumping 26 percent from 10 days earlier, Rubber Trade Association of Japan data showed on Friday.

Crude rubber stocks have been recovering after reaching a record low of 2,628 MT on July 20. Rubber inventories hit a 2010 peak on Feb. 28, of 8,222 MT. That was the highest since July 20, 2009.

Natural rubber is produced primarily in three countries — Thailand, Indonesia and Malaysia. Together, they account for about 94% of global production. India is another big producer, but it is also the fourth largest consumer of natural rubber.

A huge array of products require natural rubber, including Auto and truck tires, automobile parts, footwear, cables and wires, latex products, pharmaceutical goods, textiles, and dozens more. While most market analysts have been focusing on crude oil, natural gas and other commodities, natural rubber has slowly but surely begun its quiet bull run and it's likely to follow the trend for sometime.

  • The US, China and Japan dominate the global rubber consumption, collectively accounting for more than half of the market in 2011.
  • World rubber consumption is forecast to increase 4.0 % annually to 26.5 million MT in 2011.
  • China is the leading consumer of rubber worldwide, following more than a decade of strong growth in motor vehicle production and industrial goods manufacturing. Demand from China is expected to soar 35% to 6.83 million MT by 2010, according to the China Rubber Industry Association.
  • Demand for both natural and synthetic rubber is likely to expand at a strong pace, but the division of the market will remain essentially unchanged through 2011, with synthetic rubber continuing to hold approximately 55 % of demand and natural rubber holding the remaining 45 %.

An Overview Of Natural Rubber Market:

The rubber industry is very sensitive as the price of rubber is constantly changing and any economic decline or rise affects the rubber industry to a large extent. Prices of natural rubber are not uniform, as they vary (although they tend to have a quite high correlation) across types and grades, with variations between RSS and TSR grades (RSS being ribbed smoked sheet and TSR being technically specified rubber in block form). Separate quotations exist for latex concentrates and bulk latex. The major markets include Kuala Lumpur, London, New York, Tokyo, Bangkok, Shanghai and Singapore.

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Rubber Oriented Companies Listed On NYSE

Newell Rubbermaid Inc. (NYSE:NWL) : Newell Rubbermaid Inc. is a global marketer of consumer and commercial products. The Company’s multi-product offering consists of consumer and commercial products in three business segments: Home & Family; Office Products; and Tools, Hardware & Commercial Products.

# Mkt cap 4.63B
# P/E 15.35

Cooper Tire & Rubber Co.(NYSE:CTB): Cooper Tire & Rubber Company is a manufacturer of replacement tires. Cooper focuses on the manufacture and sale of passenger and light truck replacement tires.

# Mkt cap 1.17B
# P/E 10.60

Rubber Demand And Supply: Rubber originates from two distinct sources. Natural rubber comes from tropical plants. The major producing countries are Malaysia, Indonesia, and Thailand. Both small and large rubber plantations supply the liquid latex. Synthetic rubber is manufactured in various plants around the globe to different specifications, although generally attempting to emulate the physical properties of the natural kind.

Because rubber is used widely in both tires and non-tire applications, its future is tied to the global economy. The growth rate for rubber should outpace those for motor vehicle production and motor vehicle registration in the next ten years. Non-tire applications account for the majority of rubber usage at 52 to 54 percent of the total, with little change expected.

Natural Rubber Future Outlook 2010 And Beyond:

Non-tire rubber is likely to outpace tire rubber demand through 2011, based on a favorable outlook for mid-range elastomers (e.g.,ethylene-propylene, nitrile and polychloroprene) used in components such as hoses, belts, gaskets and weather-stripping. Tire rubber demand will benefit from the popularity of performance tires, which use more rubber than all season-radials and also have shorter service lives, thus stimulating replacement demand. Positive growth rates in world rubber consumption of 8.8 percent and 5.1 percent are expected for 2010 and 2011, respectively. Despite a return of a sharp growth rate, the average annual growth rate for 2009-2011 will only reach 1.0 percent, and much of the growth will mainly be in Asia/Pacific. This means rubber consumption may only rise to 22.97 million metric tons in 2011, which is lower than that of 23.04 million metric tons in 2007. Consumption of natural rubber (NR) is expected to show a sharper increase than for synthetic rubber (SR), i.e., an annual growth rate of 1.1 percent and 0.9 percent, respectively. The relatively lower price of NR when compared with SR helped to increase NR shares last year and is expected to do so again this year before the trend reverses in 2010 and 2011. The world rubber economy, i.e., the total combined NR and SR consumption and production, has and will be increasingly dominated by Asian countries. In 2008, Asian countries comprised 7 of the 10 largest rubber economies. Furthermore, by 2011 Indonesia will overtake Japan for fourth place behind China, the USA and Thailand. A sharp slowdown in demand in relation to supply means NR stocks may continue to increase during the next few years.

Asian Overview:

China has been progressing steadily in rubber consumption, with the tire sector scaling up production in a bid to mitigate the effect of the US Government’s imposition of 35 percent duty on import of Chinese tires into the country. The decision has seriously affected Chinese tire exports to the US. Robust domestic vehicle sales, however, have been driving up demand for tires in China, which in turn, has necessitated a large import of NR into the country.

Vietnam is expected to expand rubber cultivation by 220,000 hectares by 2015, to enhance the total cultivated rubber area to 800,000ha.

The prospect of exporting a substantial quantum of NR to China is believed to be behind the move for the expansion. Vietnam is a regular supplier of NR to China. 65 percent of its total NR exports of around 490,000 tons up to September 2009, was to its neighbor China.

The growth rate, particularly in major producing countries, may be a lot lower than during recent years; however, the relatively fast increase in production in Indonesia means it will move to a closer position to overtake Thailand as the number one producing country. The continued increase in production in India will also mean it may overtake Malaysia to become the third largest NR producer by 2011.

In 2010, with the expected higher GDP growth and an improving outlook for prices, global NR production is forecast to reach almost 10.56 million MT, a rise of 11.9 percent, compared to the previous forecast of a 3.7 percent increase to 10.0 million MT, with higher output seen in all the major NR producing countries.

The Global demand for rubber gloves is also expected to grow by 10 percent per annum. The demand for rubber gloves is reported to be increasing from India, China and Vietnam due to increase in health and hygienic awareness. Plantation expansion plans of the major NR producing countries have obviously been developed based on the rising trend in rubber prices. Since the global supply of NR is forecast to fall behind its consumption up to 2020, the current boom in the NR market is expected to continue.

Disclosure: No positions