UBS cuts Michelin hopes amid rubber price fears

Shares in Michelin slid 3% after UBS cut its rating on the stock to "sell", flagging the difficulties tyremakers are suffering in passing on higher costs of both natural and synethetic rubber.

The bank also lowered to "neutral" from "buy" its recommendation on shares in Japan's Yokohama Rubber and Sumitomo Rubber Industries, warning of rubber costs rising to $4.20 a kilogramme next year, some 20% higher than previous forecasts.

"While the price of [natural rubber] may reflect a spike, we expect supply constraints to remain significant, as demand for natural rubber looks set to exceed production," UBS analysts said.

"Beyond adverse weather conditions negatively impacting rubber harvests in the fourth quarter, supply of natural rubber looks set to remain tight as a result of ageing hevea trees and low levels of replanting."

'Weak link'

Meanwhile, prices of synthetic rubber, which also have a bearing on the market for natural alternatives, were rising too, up 9% in the past two weeks, thanks to rising prices of oil, from which it is made, and manufacturing constraints.

Breakdown of Michelin's raw material costs

Natural rubber: 28%

Synthetic rubber: 26%

Fillers:16%

Chemicals: 13%

Steelcord: 10%

Textile: 7%

Sources: Michelin/UBS

Such higher costs boded ill for tyremakers, who looked the "weak link in the value chain", facing increased competition as emerging market manufacturers hit the mainstream.

French-based Michelin looked especially at risk thanks to its "high exposure to natural rubber-intensive truck tyres and to price sensitive consumers and distributors".

Shares in the group closed down E1.67 at E54.58 in Paris, taking their decline since a late-September high to some 15%.

'New era'

The downgrades came as rubber touched a three-week high in Tokyo of 378.8 yen a kilogramme, for the benchmark May contract, lifted by the rising price of oil, and therefore implied inflation in synthetic rubber.

"Natural rubber prices have not decoupled from crude oil prices for the past few months," Ker Chung Yang at Phillip Futures said, seeing potential further rises in oil to $92 a barrel for next year.

Meanwhile, demand for the commodity remains high, boosted by surging demand for cars in developing countries, and in particular in China and India.

"General sentiment on natural rubber remains bullish on supportive fundamentals," Mr Ker said, forecasting a "new era" of high prices.

(Source: http://www.wikinvest.com/wikinvest/api.php?action=viewNews&aid=2112007&page=&format=html&comments=0)