Steady demand for products to drive rubber sector
KUALA LUMPUR: Analysts expect steady demand for rubber products to continue driving the sector, with supply set to increase in financial year 2018 (FY18).
According to the research arm of Hong Leong Investment Bank Bhd (HLIB Research), China’s clamp down on its own vinyl glove sector, due to the highly polluting nature of vinyl glove plants which do not comply with their new environmental stance has since seen demand shift towards nitrile (NBR) and natural rubber (NR) gloves to the benefit of the Malaysian players.
“Consequently utilization rates across the industry have increased from circa 80 per cent to 85-86 per cent, with Hartalega Holdings Bhd (Hartalega) even operating at close to 92 per cent utilisation rate,” HLIB Research said.
As such, the research arm was of the opinion that the extra capacity can be well absorbed by the global market despite oncoming supply appearing to be in excess of the estimated annual demand growth of eight to 10 per cent.
On the ringgit, HLIB Research highlighted that it is trending on the upside; the research arm’s house view of the ringgit-US dollar in 2018 is a range of 4- 4.2 with an average of 4.1.
“Relative to 2017 average of 4.3 this is an appreciation of 4.9 per cent on average yoy for the ringgit,” the research arm said.
“As exports account for more than 90 per cent of revenues which are denominated in US dollar, while a substantial portion of the cost base denominated in ringgit, a stronger ringgit will affect revenues upon translation into the home currency.”
Based on HLIB Research’s sensitivity analysis, for every one per cent depreciation in US dollar, the research arm’s earnings forecast will be impacted by four to six per cent on the downside for the companies under its coverage assuming average selling price (ASP) remains constant.
However, it noted that ASP will eventually be adjusted to pass through the ringgit appreciation to customers.
HLIB Research pointed out that Top Glove Corporation Bhd (Top Glove) has the highest sensitivity towards US dollar depreciation among the glove companies, given its higher exposure to latex glove.
The research arm estimated that for every one per cent appreciation in the ringgit earnings will decrease by circa five to six per cent assuming ASP remains constant.
As for Hartalega, HLIB Research noted that has a natural hedge due to NBR being priced in US dollar.
The research arm estimated that for every one per cent deprecation in the US dollar earnings will decrease by circa four per cent.
“However, we believe that rubber product companies will be able to pass through the ringgit appreciation to customers via an increase in ASP relatively easily on the back of the shortage of gloves from China’s pollution crackdown,” it said.
In 2018, HLIB Research expected the prices of both NR and NBR to be range bound, with both NR and NBR to fluctuate within the RM5 to RM6 per kilogram (kg) mark, barring any further unforeseen circumstances such as flooding in rubber producing regions and or Butadiene plant shut downs.
Overall, HLIB Research opined that the sector fundamentals are intact, with rubber gloves remaining a cost-effective barrier of protection against diseases and infections.
“The Malaysian Rubber Glove Manufacturers Association (MARGMA) projects global rubber glove demand to grow by eight per cent to 10 per cent driven by the world’s growing and ageing population, rising healthc are awareness, more stringent healthcare and food safety regulations and healthcare reforms,” it said.
As such, HLIB Research maintained its ‘neutral’ stance for the sector in 2018.
“The change in supply demand dynamics caused by the disruption of production in China and the entrance into new markets will ensure the offtake of the extra capacity coming in partially offsetting the strengthening ringgit’s effect on earnings.”