Rubber gloves sector to shine this year despite higher costs
KUALA LUMPUR: Analysts are positive on the rubber gloves sector’s 2019 prospects despite an increase in overall production costs.
The research team at Affin Hwang Investment Bank Bhd (AffinHwang Capital) said as the overall increase in production costs is minimal at around 1.3 to 1.6 per cent, manufacturers should not have a problem passing on the added cost in the current environment.
“Assuming a worst-case scenario whereby manufacturers are to absorb the incremental cost, the impact to their net profit is around four to eight per cent,” it said in a report yesterday.
“However, we believe the chance of this worst-case scenario playing out is low, as we do not foresee any overcapacity impacting the sector.”
To note, the rubber gloves sector saw an increase in its labour cost as well as utilities cost as the government had raised the overall minimum wage in Malaysia while there have been increases in electricity as well as natural gas tariffs.
“We estimate the increase in the minimum wage would likely lead to 0.8 to 1.0 per cent increases in production costs.
“However, we believe that the impact is unlikely to be as severe as with previous hikes due to an increase in automation in production lines since the introduction of the minimum wage in 2013.
“Since then, most manufacturers have started to automate their equipment to reduce labour dependency.
“Currently, labour costs account for eight to 10 per cent of production costs,” said the research team.
Aside from that, AffinHwang Capital noted that both of the increases in electricity and natural gas tariffs of around 0.5 to 0.6 per cent which was expected due to rising fuel prices.
“As the increase is not as significant as previous hikes, we believe manufacturers should not have a problem passing this on, as the increase in energy prices has been an annual occurrence for some time. Energy (power and natural gas) costs for the manufacturers comprise around 12 to 15 per cent of their production costs.
“Again, as the manufacturers were aware of the increase in costs in advance, the ability to communicate these changes to their clients put them in a more favourable position,” the research team opined.
“We believe that the impact of cost increases related to the hikes in the minimum wage, electricity tariffs and natural gas prices will not be a burden to the rubber glove manufacturers, as the overall increase is only around 1.5 per cent of its production cost.
“As some of the increases were made known ahead of time, and given the magnitude of the increase is not significant, most manufactures should be able to pass on the added cost to their customers within a month; hence we forecast the negative impact to margins should be minimal.
“Fuel and labour account for around 20 to 25 per cent of the overall production cost,” said AffinHwang Capital, which maintained its ‘overweight’ rating on the sector.