Tariff hike to have negligible impact on rubber glove players
KUCHING: The upward revision of natural gas tariff for the non- power sector in Peninsular Malaysia will have negligible impact on glove players’ earnings, analysts say following the announcement by Gas Malaysia Bhd (Gas Malaysia) on Bursa Malaysia.
Gas Malaysia revealed that under the Gas Cost Pass-Through (GCPT) mechanism, a surcharge of RM0.23 per MMBtu will apply to all tariff categories for the period beginning January 1, 2019 to June 30, 2019.
“This translates to an average effective tariff of RM32.92 per MMBtu, which is an increase of 0.70 per cent from the current average tariff after surcharge,” the group said.
As per the revised tari f f schedule, the research arm of MIDF Amanah Investment Bank Bhd ( MIDF Research) noted that most of the major glove players fall within the category F and L.
According to MIDF Research’s calculation, on average, they will experience less than one per cent increment in effective gas tariff from the previous tariff.
“Moreover, on average, natural gas constitutes only about 10 to 12 per cent of the total production costs for the glove producers under our coverage,” the research arm said.
“Hence, according to our calculations, all four glove producers under our coverage will experience negligible impact on earnings of about less than one per cent arising from this latest revision in natural gas tariff as the increase in effective gas tariff is only 0.7 per cent compared to the previous period.”
“In addition, we believe that the impact on earnings will be fairly minimal due to the current low raw material costs such as Nitrile Butadiene Rubber ( NBR) and natural rubber, opening of new plants with latest technology which is energy efficient and cost past- through mechanism whereby the cost increase will be shared with customers.”
The research arm of Kenanga Investment Bank Bhd ( Kenanga Research) had a similar view on this as it noted that assuming a “no- cost pass through”, an average 0.7 per cent increase in natural gas tariff is expected to only marginally impact rubber gloves players’ earnings by 0.20.5 per cent based on our backofenvelope calculations.
“Players can easi ly raise their average selling prices to pass cost through,” Kenanga Research said. “Generally, its takes approximately between one to three months to pass through the cost increase.”
Looking ahead, MIDF Research viewed that demand for glove will continue to increase, driven by more stringent hygiene requirement.
The research arm opined that glove manufacturers will capitalise on this demand by continuously expanding its production capacity.
“However, there are risks that overexpansion in capacity would lead to downward pressure in average selling price (ASP) and higher operating costs.
“In order to maintain operating costs, we take comfort in knowing that glove manufacturers are actively looking at ways to reduce the escalating cost of labour and energy.
“Bearing this in mind, we expect that the glove player’s prof it margin wil l remain stable.”
On the other hand, Kenanga Research foresees that potential oversupply is looming and strong demand tapering off.
“Following a period of capacity consolidation starting back in mid-year 2016, which led to falling ASPs, nascent signs of glove- makers ramping up capacities are emerging again.
“The robust demand is attracting players to ramp up production. In anticipation of higher demand and switching from vinyl gloves, players are raising capacities again.
“Our analysis suggests that potential oversupply is looming. Note that previous two oversupply occurs back in year 2014 and 2016.”
The research arm also noted that the production of vinyl gloves in China has resumed and normalised in early 2018.
“Hence, we understand that over the past six months, delivery lead times ( the time frame between order and delivery) has shortened from between 60 to 70 days as compared to 30 to 45 days, potentially indicating that strong demand is tapering off.”