Natural rubber prices on fire on high demand, lower supply

MUMBAI (makemystocks): The budding auto sales coupled by positive logistics outlook and surging tyre demand, has led to demand-supply mismatch of natural rubber in India, the world's fourth largest rubber producer.

The natural rubber supplies are expected to slow down to 5.2% on year in 2010 from the previous estimate of 6.1%, revealed the Association of Natural Rubber Producing Countries. World natural rubber output in 2010 is estimated at 9.38 million tonnes compared with last year's 8.92 million tonnes.

The high rubber prices discourage the farmers from replanting the aged trees and thus the output of the natural rubber is getting adversely affected. The higher proportion of low yielding aged trees will exert a downward pressure on rubber yield this year and 2011, the global rubber body said.

Between April and May 2010, auto sales jumped by 28% as compared to the same period last year, while exports grew by a staggering 68%.

The robust auto sales led to the prices of RSS 4 grade rubber rose by 19.1% between Jan-Apr on tight supplies and robust demand. At present, they are hovering at an all-time high of Rs 18,000 per metric tonne and could even top Rs 20,000 if demand doesn't slow down.

The natural rubber imports declined by more than 50 per cent at 9,255 tonnes during the month of June, on the back of surging global prices according to Rubber Board data. Whereas, India imported 20,258 tonnes in the same month last year.

For FY 2010-11, Rubber Board has projected rubber production to grow by 7.4 per cent at 8.93 lakh tonnes against 8.31 lakh tonnes in last fiscal while the domestic consumption is estimated to rise to 9.78 lakh tonnes this fiscal against 9.30 lakh tonnes in FY 2009-10.

Inspite of the hovering rubber prices some of the stocks have performed well on the Indian bourses during the last one quarter, due to strong market sentiments.

Leading rubber stocks that have performed well includes Schrader Duncan Ltd (BOM:504908) that rose to 19.02% in the last quarter while, MRF Limited (BOM:500290) and Indag Rubber Ltd (BOM:509162), have spurted up to 14.28% and 3.99% respectively in the similar period.

On the other hand, stocks that have been affected the most due to upward pressure on rubber prices are Ceat Limited (BOM:500878), JK Tyre & Industries Ltd. (BOM:530007), Apollo Tyres Limited (BOM:500877) and Dunlop India Limited (BOM:509130) declining to 12.36%, 20.13%, 10.8% and 1.75% respectively in the past one quarter

It is projected that rubber prices will remain high, at least in the next few months, as there is limited scope for supplies to improve due to climate constraints, the unfavourable age structure of existing trees, acute labour shortage in plantations and the rising number of small holdings that limit the possibilities of enhancing yields using short-term measures.

India's Rubber board has already cut natural rubber output forecast for 2010 by 10,000 tonne to 885,000 tonne. Supply is likely to improve after 2011 when new rubber trees cultivated from 2005 onwards come up for tapping.