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Sri Trang Sales Volume To China Could Reach Record High In 1Q13; Remains Bullish On The Chinese Market
Corporate Digest | 05 April 2013
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By: Jade Lee
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2012 was a challenging year for Sri Trang Agro-Industry PCL (Sri Trang). In fact, the largest rubber processor in Thailand has seen its shares slumped by as much as 37.9 percent to $0.565 in December 2012 since it peaked at a high of $0.91 in March 2012. So, how will Sri Trang fare in 2013?

The reason behind the fall is not hard to find. For the past two years, rubber consumption, a strong indicator of the demand in the tyre industry, has been dragged down by the flat demand from China, India and the US, coupled with the downturn in industrial production in Europe. And like any other participants in the natural rubber (NR) industry which has limited influence over the timing and extent of the price changes for NR, Sri Trang was not spared against this backdrop.

As forecasted by global rating agency Fitch, the global tyre market conditions are expected to remain challenging over the intermediate term due to slower economic growth in several key emerging markets, in particular China and India. With majority of Sri Trang’s products now sold to conventional tyre manufacturers around the world, a few key questions have been flagged: Has the rubber price bottomed out? Will Sri Trang continue delivering profitable growth in 2013?

China – The Main Growth Driver

Touted as the world’s largest NR consumer, China consumes about 70 percent of NR in tyre making, of which 70 percent is for heavy-truck tyres. However, as the country is now shifting from heavy industries to a more consumption-driven growth model, the demand for large trucks tyres, thus, is expected to slow down, said China’s largest tyre maker Hangzhou Zhongce Rubber. In addition, even if China’s economy is recovering, there are worries whether the infrastructure projects and investment will be able to keep up at a speed that will stimulate heavy-truck sales.

Sri Trang, which has sizeable market share in China, has seen its revenue from the region dropped slightly 6 percent to 1.2 billion Baht for FY12. GMG Global, another fallen victim, has also reported a 25 percent drop to $481 million in FY12 revenue due to weaker tyre demand in China

Nonetheless, a silver lining in the dark cloud would be China’s growing passenger car market in 2013. Notably, China’s wholesale deliveries of cars, multipurpose and sport-utility vehicles jumped 20 percent to 2.84 million units in January and February, according to the China Association of Automobile Manufacturer.

“Our sales volume to China during 1Q13 grew at a very satisfactory rate. We believe that it would be a record sales volume,” said Busarin Leelawankulsiri, assistant vice president of investor relations at Sri Trang. In fact, China’s division accounted for more than 40 percent of Sri Trang’s total sales volume in FY12, translating into a 33.1 percent jump to reach 422,548 tons from last year. “China will continue to be our main customer in the future,” remarked Leelawankulsiri.

As a result of strong demand, the firm is targeting annual capacity of 1.5 million tons in 2015. That is roughly 0.4 million higher compared to its current optimum annual capacity of 1.1 million tons, the highest capacity in the industry. As at 31 December 2012, a total of 27,400 rai (4,384 hectares) of land, of which the majority are located in the North of Thailand, have been acquired by Sri Trang.

Rubber Price To Bottom Out?

The direction of rubber prices remains arguable. Phillip Securities thinks the rubber prices have already bottomed out and that global economic improvement could be a key mechanism for a recovery in rubber prices. Yet, with the plan on reducing 30 million tons of NR exports in three major rubber producing countries (Indonesia, Malaysia and Thailand) expiring in the end of March and China’s burgeoning stockpiles, market watchers are of the view that the rubber prices may decline further.

“The high volatility and downward movement of NR price during 2Q11 to mid-3Q12 have removed a number of speculative investors, and an approximate 25 percent jump in NR price as compared to the bottom price in mid-August 2012 so far has brought the NR price back to its equilibrium level,” explained Leelawankulsiri when asked about the direction of NR price.

Following a lethargic growth of NR consumption in 2012, IMF and The World Rubber Industry forecasted a growth rate of 6 percent for NR in 2013, in line with improvement in tyre and new vehicle productions. “There should be less volatility in NR price in the short to medium term under this economic climate…An improved growth prospect of main consuming countries will also support the balance of global demand and supply for rubber, thereby creating more price stability,” added Leelawankulsiri.

Bottom line: Will Sri Trang’s earnings manage to stray from fluctuation in commodity price amidst a weak global recovery? Nobody can guarantee for sure. Nonetheless, with China still maintaining its gross domestic product of 7.5 percent for 2013 and is having a significant impact on the global rubber consumption, this could certainly act as a catalyst to moderate, or reduce further negative pressure on the NR prices in the coming years.
Jade manages and oversees a portfolio of stocks which are mainly focused on the mining and property sectors at Shares Investment.

Please click here for more information about this author.

Sri Trang Agro-Industry Public Co  -- -- --   
Business: An integrated natural rubber biz involved in the entire natural rubber supply chain.

Insight: May-18, 1Q18 revenue slumped 38% to THB17.7b due t... Read More


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