How to profit from the rubber bounce

  • Rubber glove demand has risen sharply with Covid-19
  • Rubber has been in a long slump but could bounce back as supply is tightening
  • Proxies for the rubber rally include Thailand's Halcyon Agri and Singapore's Sri Trang
How to profit from the rubber bounce

Covid-19 has led to a huge boom in demand for rubber gloves. Rubber companies (producers and processors) are making hay while the sun shines by rushing to the market.

Thailand's Sri Trang Gloves, one of the largest rubber glove producers, has just announced plans to raise US$484m. Halcyon Agri (HACL SP – controlled by a Chinese state-owned enterprise), the world's largest rubber processor, is looking to raise S$175m in a rights rise. The rights are priced at a 36% discount to the last transacted price on 19 June. Halcyon Agri is.

Meanwhile, the world's largest rubber glove producer Top Glove, listed in Malaysia, has risen 251% this year. It expects to generate 35% of its revenue growth on the back of the Covid-19 surge.

Covid-19 drives demand for gloves

With rubber gloves being used by medical practitioners to prevent the spread of disease and by the general public as PPE (personal protective equipment), Covid-19 has seen orders swell.

Rubber glove demand is expected to rise by nearly 17% yoy to 330bn pieces in 2020, according to Margma, an industry observer. Top Glove has reported a four-fold increase in orders. The lead time for orders has risen from 30 days to almost 300 days.

Rubber prices could surge

The world tends to focus on industrial commodities such as oil and iron ore, disregarding rubber, but the latter is vital for car tyres – c70% of the world's natural rubber is used for tyres, with the remainder is used for rubber gloves, condoms and other applications.

Rubber has collapsed more sharply than oil in the recent commodity rout and is now at a 15-year low, more than 60% below its 2010 peak, mostly due to fear that travel would grind to a halt with Covid-19.

However, there are distinct signs that a rubber bounce is imminent. Demand for cars in China is robust and could rebound quickly, not least given that only c50% of Chinese families have a car. If car penetration doubles in China in the next decade, rubber supply will have to rise 50% to meet demand.

Rubber supply, though, emerges at a slow pace. It takes seven years to harvest rubber and another three to reach peak production.

Moreover, many rubber plantations are struggling, with Thailand, Malaysia and Indonesia (the main producers of the 13.9mn tonne rubber market, over 80% of which is produced in Southeast Asia) all having imposed moratoriums on rubber planting this year. Supply could contract, and 2020 could see demand exceed supply for the first time in three years.

Look out for stock market proxies

Therefore, investors would be well-served to focus on the proxies for a potential rubber price rise.

Halcyon Agri, which is listed in Singapore, with operations in Ivory Coast, Cameroon, Indonesia and China, is raising funding for an expansion and debt repayment at a turning point for rubber prices. As a processor with a tight grip on rubber supply, it could be viewed as the ideal proxy for a rubber rally.

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