Natural Hedge Curbs Rubber Price Volatility

SET-listed Sri Trang Agro-Industry (STA) expects to see its revenue jump by 30-40% to 100 billion baht this year from business expansion and an increase in production capacity in all types of rubber products.
Kitichai Sincharoenkul, an executive director of STA, the world's largest block rubber distributor, said the company was seeing solid demand in the market driven by strong economic growth in Asia and emerging economies.
STA plans to increase production capacity to 1 million tonnes this year, from between 800,000 and 900,000 tonnes last year, with sales volumes to rise by 12-13%.
An increase of production capacity is likely to lift its market share to 10% from 8.4% now. In the next five years, it expects to see volume climb to 1.5 million tonnes with a market share reaching 15%.
"We hope to increase bargaining power in the global market as our market share increases," said Mr. Kitichai.
At present, about 30% of the company's sales volume is through futures contracts using the underlying price of contracts on the Singapore Commodity Exchange (Sicom) as a benchmark, while the rest is traded at the spot price on the Sicom.
Rubber has exhibited high price volatility in the past year. STA has hedged only 10% of its total sales volume since it is also able to reduce risks through natural hedging via spot trading.
Mr Kitichai forecast the average price of rubber this year would be around US$4,000 per tonne, compared with $3,300 to $3,500 last year. The commodity is currently trading around $5,300 per tonne.
He said tyremakers had continued to increase their production capacity since last year even though raw material costs keep rising. However, the tyremakers have already raised prices around 6-7%.
Mr Kitichai said the number of cars sold in China has continued to jump. During the first two months, sales rose 10% from the same period last year.
STA has expanded from the upstream to midstream business, with a plan to grow rubber trees on 50,000 rai by 2015 while aiming to produce all types of rubber products for midstream business. The total investment for the project is around 2 billion baht for this year.
Last year, STA reported total revenue of 84 billion baht, up from 45.59 billion in 2009, with net profit rising to 3.85 billion baht from 2.14 billion.
STA shares closed yesterday (Mar 24) on the Stock Exchange of Thailand at 28 baht, down 50 satang, in trade worth 156.7 million baht.
(Bangkok Post, Thailand, March 25, 2011)