"During the gold rush, it is a good time to be in the pick and shovel business." — Mark Twain
As the shares of glove makers skyrocket, a rubber rally seems imminent. Investors would be well-served to heed the lessons of an old British soldier.
Algy Cluff has made his money in North Sea oil and African gold. At 80, there is still much petrol left in his tank. He has just launched a new African oil venture after a glittering run as the Chairman of London-listed Cluff Gold.
Cluff is tall, lean and always polite. His wife joked that he should change his name to Club, as he spent so much time on them. Despite his stately manner, luck played its part in Cluff’s ascent.
He owes his success to a chance meeting in the Long Bar of the Raffles Hotel in 1961. Cluff, then 21, was a Major in the British Army. While he was sampling the Singapore Sling, he ran into Charles Letts, a 46-year-old Scotsman.
Letts was a trader who was established in the Straits Settlements. He was fluent in Malayan commerce, as well as Hokkien, Thai and Malay. Letts persuaded the young Cluff to invest in rubber companies. The Malayan rubber companies were trading at well below their book values. Rubber prices were likely to rise with the explosion in tyre demand.
The conversation prompted Cluff to get his father Harold to invest in Malayan rubber stocks. The rubber stocks rose sharply, as the demand for tyres rose. The value of the land held by the rubber plantations appreciated. The rubber price increased three-fold in the 1960s, but the rubber stock prices rose six-fold.
When Cluff left the army, his father let him keep the profits. It meant that the young man did not need to take a job. He could focus on business. The rubber profits seeded Cluff’s foray into oil, gas and gold.
Today, rubber is similarly placed to its level in 1961. Instead of rubber tyres, the swing factor is now from rubber gloves. Covid-19 has led to a scramble for rubber gloves. Top Glove Corp, the largest rubber glove producer in the world, has seen a surge in orders. It was previously running at less than 70% capacity. Today, its 44 factories are operating 24 hours a day, seven days a week. It is servicing orders from as many as 195 countries. Top Glove has surged 445% this year. It is now the second largest company on the KLSE. Another glove producer Malaysian rubber producer SuperMax is up over 1000%.
There are two types of rubber — natural rubber and synthetic rubber. Each type has production of about 13m tonnes. The prices of the two categories move in tandem, as synthetic rubber requires natural rubber. Natural rubber is the main ingredient for most types of tyres. About 70% of natural rubber is met by tyres. The remaining 30% is made up of gloves, condoms and other sanitary applications.
Natural rubber prices are 80% below its 2010 high of US$6,100 ($8,403). At a price of US$1,300 per ton, rubber is still only marginally above its cost of production. Prices have been weak for the last six years. The rubber route since 2014 is due to misplaced fears of a Chinese slowdown. The craving for cars in China is unlikely to end with Covid-19. Only a third of China’s families own a car. This is less than half the level in the US in 1920. If the car population doubles in China by 2030, rubber production will have to rise by 50%. Natural rubber demand fell 20% in 1H2020 due to Covid-19. But China, which represents 40% of rubber demand, is showing signs of recovery.
Investors may seek exposure to rubber through the listed proxies. Halcyon Agri, the world’s largest rubber processor, is listed on the SGX. It is controlled by Sinochem, a Chinese state-owned enterprise that has rubber plantations in West Africa. Halcyon Agri operating performance is exposed to the natural rubber prices.
Other processors include Sri Trang Agro listed in Thailand and Singapore. Sri Trang has just completed a US$480 million IPO of its glove unit. The rubber price may be about to bounce even harder. Discerning investors could replicate Cluff’s success without going to the Long Bar.
Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer (Exotix Capital)
