Monday, August 29, 2011

Sri Lanka rubber exporter pinched by export taxes, interest

Aug 29, 2011 (LBO) - Eastern Merchants Plc, an exporter of commodities that claims top spot for natural rubber exports from Sri Lanka said its margins were eroded by rising working capital costs and export taxes despite steep commodity inflation.

Eastern Merchants group, which exports rubber, coir fibre, cinnamon and brushes said revenues grew 53 percent to 6.0 billion rupees but gross profits shrank 18 percent to 174 million rupees.

Rubber prices had hit historic highs as the US dollar weakened against commodities and demand for natural rubber rose with synthetic rubber prices also rising.

An export tax on rubber which was originally 4.00 rupees had been increased to 8.00 rupees in November 2010 and then 12 rupees in March 11.

States try to impose such 'windfall' taxes when commodity prices rise and such taxes are sometimes imposed against oil and mining industries in particular.

The group exports cinnamon, desiccated coconut, coir and also has units making brushes and claims to be the largest exporter of natural rubber.

Erratic weather had disrupted supplies and coconut fibre supplies continued to be below demand.

"Furthermore, the high price of rubber demanded an ever-increasing amount of funding to fuel operations," chairman J B L de Silva told shareholders.

"This resulted in inflated finance costs for the Company in spite of a relatively stable policy rate maintained by the Central Bank."

Group interest costs rose 46 percent to 35 million rupees due as more money was required to maintain stocks.

Net profits fell 61 percent to 24.4 million rupees. The group had short term borrowings of 529 million rupees by March.

"[H]having been negatively impacted by ballooning finance expenses during the year under review, it is clear to us that improving the working capital requirements of Eastern Merchants is essential to ensure future stability and growth," de Silva said.

"Possible avenues to strengthen the working capital reserves of the Company are currently being explored."

The company however says high commodity prices may reverse like in 2008, when a US credit bubble collapsed.

Sheet rubber which was about 3.00 US dollars and halved when prices collapsed in 2008, is now over 5.00 dollars.

The company however says prices may fall again.

A "drop in historically-high rubber prices" and reduced volatility may give more stable trading conditions, de Silva said.

source -

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