OSE Derivatives

Highlights

• Global natural rubber production rose in May 2022 but shortfall for the month still recorded
  

• ANRPC expects global NR supply to increase by 2.3% this year but overall shortfall still forecasted
  

• Rubber sector profit in Malaysia expected to decline in Q2 2022

Global NR supply up, profit outlook bleak

The global natural rubber supply has made a marked improvement to 991,000 tons in May 2022 from 941,000 tons in April 2022. Such a figure was 954,000 tons in March this year. A shortfall of 198,000 tons was recorded in May against an estimated demand of 1.19 million tons. While several NR producing countries are entering the off-tapping season, the market is optimistic about supply improving moving forward.

According to the Association of Natural Rubber Producing Countries (ANRPC), even though the NR physical and futures markets went up in May, the average prices across key markets fell when compared to April 2022. Helixtap SIR20 and Helixtap STR 20 prices were US$1,840/mt and US$1,830/mt at the start of April. Prices subsequently trended downwards to US$1,792.50/mt and US$1,1720/mt at the end of May. The prolonging conflict between Russia and Ukraine coupled with Covid related lockdowns in China have impacted the market negatively. However, general market fundamentals remain favourable.

ANRPC positive on outlook but cautious

In March this year, the ANRPC forecast a positive outlook for the global natural rubber market for the year 2022. It said that the world NR production is expected to grow by 2.3% to around 14.3 million tonnes. Production from Thailand, Indonesia and Malaysia is expected to increase by 1.4%, 4.0% and 6.5% respectively. In contrast, production from Vietnam is expected to dip marginally by 0.4%. On the other hand, world NR consumption will likely register a growth of 2.2% to around 14.6 million tons in 2022. Demand from China, India and Thailand is expected to increase by 0.5%, 3.5% and 11.8% respectively.

The ANRPC, however, cautioned against the impacts of climate change and labour shortage in NR-producing countries potentially affecting supply. Particularly any recurring Covid-19 variant is likely to work against an increase in output. The ANRPC expects an increase in demand to also come from the healthcare and automobile sectors.

Global economic institutions downgrade economic growth

In April, the World Bank revised downwards its projection for global economic growth for 2022 from 4.1% to 3.2%. They cited the Russia-Ukraine conflict and the Covid related lockdowns in China as crucial factors hindering global economic recovery. Similarly, the United Nations Conference on Trade and Development (UNCTAD) also recently downgraded its 2022 global economic growth forecast by 1% to 2.6% for the above reasons.

In an attempt to curb inflationary pressure, major central banks around the world have responded by increasing interest rates. While current high inflationary pressure is likely supply induced, an increase in interest rates and a subsequent slowdown in the economy will further taper any demand led inflationary pressure. Such moves to maintain price stability will likely lead to a slowdown in the global economy in the months ahead.

Decline in Q2 rubber sector profit too

Meanwhile Kuala Lumpur-based retail banking company Affin Hwang Capital has come out with projections that the earnings from the rubber sector in the Q2 2022 will fall below the 2019 levels due to a continued decline in average selling prices (ASPs).

The rubber glove manufacturers surveyed by Affin recorded a lower quarter-on-quarter profit in Q1 2022 due to a fall in ASPs amid rising production costs. This is against a backdrop of higher sales volumes being posted. The increase in labour, fuel and electricity costs since the start of the year have become the major worry for the producers. They are also finding it hard to pass on the higher production costs to their consumers. On top of this, there are more capacity additions coming up in the industry which will likely make the situation even harder. Affin expects such a situation to ease by the year-end.