Another Commodity Under Pressure – Rubber

Rubber production in Asia is well below its usual levels due to bad weather. This is yet another commodity with supply constraints along with corn, wheat, cocoa and potash. Demand for products that use rubber is soaring so the price of this raw material is rising. We will look at the companies that could be most affected by this trend and see how investors are positioning themselves. Stocks covered include: Michelin (ML), Bridgestone (5108), Goodyear, Continental Ag, Peugeot, Renault and Okamoto Industries (5122).

A broker cited in Bloomberg’s Businessweek reckons that rubber inventory stock piles will only cover 67 days of projected demand next year which will have a knock on impact on price.

The first company to talk about is the French listed tyre maker, Michelin (ML). On the 28th September it announced a capital increase via a rights issue and it is not clear whether this is partly in response to rising input costs. Regardless, the demand to borrow their shares has soared and 26% of ML’s shares are on loan.

Japan listed Bridgestone (5108) has seen a doubling in short selling over the last week. The company announced its second price rise in August so this isn’t perhaps surprising for the world’s biggest tyre maker by sales.

With many car makers looking to increase production volumes this implies a greater demand for more rubber. Short selling is low in Goodyear and Continental Ag so it isn’t entirely clear that it is the tyre manufacturers who will suffer. If they are able to successfully pass on the cost, then it could be the auto makers who will see their margins squeezed by price conscious consumers. The cheaper car makers could be most under pressure since their target market are more cost conscious that the buyers of Germany’s luxury brands, for example. This provides additional context to our piece last week, which noted short selling in Peugeot and Renault.

Of course, it is not just car companies who buy rubber. The medical brigade use rubber gloves in great quantities and this could affect Japan’s Okamoto Industries (5122) but short sellers are not active here.

UK Condom maker, SSL, agreed to be taken over earlier this summer – just in time it seems!