Inelastic demand for rubber gloves

Analysts say rising costs and weaker US dollar unlikely to affect big players

ON the surface, it looks like tough times for rubber glove makers — with raw material costs escalating and a weaker US dollar against the ringgit potentially eating into revenue.

A disruption in the production of butadine, a core material in the production of nitrile latex as a result of Hurricane Irma in the United States has sent prices soaring.

The highly-volatile prices of latex have also been pushed up due to speculation, a common occurence ahead of the International Tripartite Rubber Council meetings, with the latest meeting having taken place in Bangkok yesterday.

Latex prices have risen 19% in the past two months, most likely due to weather conditions and higher demand, while nitrile rubber prices increased 5% during the period, and they are expected to continue the uptrend as they usually tracks latex prices.

Butadine prices, on the other hand, has spiked by 60% in two months. The US dollar against the ringgit, meanwhile, has declined by over 5% to RM4.20 currently from a peak of RM4.45 in March 2017.

Apart from raw materials, labour and utility costs, which comprise about 20% of glove players’ operating costs, are also on the rise.

Whenever costs rise, glove makers pass them on to their customers via higher ASPs, but the concern is whether this will affect their competitiveness and demand for the product.

In addition, glove manufacturers are said to take about two to three months to pass on the cost increases to their customers, so profits could initially be impacted during this period.

Earlier this week, the Malaysian Rubber Glove Raw material prices Manufacturers Association (Margma) sounded warning bells about the impact of Hurricane Irma, saying that the rise in butadiene prices would in turn, push up nitrile latex prices.

President Denis Low Jau Foo said latex prices had also been affected by speculation, and cautioned that rubber gloves prices would rise between 9% and 12%.

The association called on its members to revise the prices of gloves to reflect the sharp rise in production costs, and to limit the validity date to a shorter period so as not to get caught out in the unpredictability of rubber and butadiene prices.

The prominent listed players in Malaysia are Top Glove Corp Bhd, Supermax Corp Bhd, Hartalega Holdings Bhd and Kossan Rubber Industries Bhd.

According to Maybank Investment Bank Research, some players have already raised their ASPs by 3% between August and September to reflect the higher raw material costs.

However, it says margins may still initially be affected for two or three months between the raw material inventory period and the final product billing date.

Still competitive

According to Top Glove, there is typically a two-month time lag before price revisions come into effect.

Executive chairman Tan Sri Lim Wee Chai tells StarBizWeek that their ASPs were adjusted within the 9% and 12% range as estimated by Margma.

“There will be a short-term effect on our bottom line before the price adjustment kicks in,” he says.

However, the move will not impact the group’s competitiveness as other glovemakers in Thailand and Indonesia are also facing the same issue.

As for the impact of the exchange rate, Lim says a weaker or stronger US dollar will only have a short-term impact as the cost-sharing mechanism will come into effect.

“Our preference is for a stable ringgit which provides more certainty, which is good for businesses and the country,” he says.

Kossan general manager for group corporate planning and investor relations Edward Yip also stresses that competitiveness is not a concern in this situation.

“Raw materials such as natural rubber and crude oil are commodities traded internationally in the US dollar, via various commodity exchanges worldwide.

“Due to this, no one is spared from the impact and the question of losing our competitiveness does not arise at all,” he says.

In other words, all glove makers including those from Malaysia, Thailand, Indonesia, Vietnam and India, are on the same boat in terms of their exposure to rising costs.

Driving earnings

The bad news about rising costs aside, the demand for both natural rubber and nitrile gloves rubber gloves is perceived as “inelastic” or unaffected by changes in pricing.

The industry has the unique ability to weather periods of increased costs by passing them on through higher selling prices, while demand for rubber gloves is expected to grow 6% to 8% each year.

A major consumer of the product is the healthcare sector, where demand growth continues to be driven as healthcare awareness and the rise in spending in both the public and private sectors, along with increasing regulation of the sector.

A recent major development is China’s participation in Paris Climate Agreement, whereby the country is expected to push the move from vinyl plastic gloves to rubber gloves.

With the consistent strong demand for rubber gloves from Europe and the United States, as well as increasing consumption in Asian markets, the global outlook in terms of demand remains very encouraging.

According to Margma, there has been strong demand for rubber gloves between January and June 2017, with revenue climbing by around 25% to RM8.1bil from RM6bil in the previous coresponding period.

“Various glove makers have highlighted that they are currently in an oversold position, with their capacity fully taken-up by customers till end-December 2017,” noted CIMB Research, which has an “overweight” call on the sector.

Top Glove’s Lim says demand for rubber gloves continues to grow in line with increasing hygiene standards and healthcare awareness, along with a growing ageing population, who are susceptible to disease and require more medical attention.

He also cites progressively stringent health regulations which mandate the use of gloves, as well as the emergence of new health threats.

According to its recent financial statement, Top Glove’s expansion plans include the construction of three new manufacturing facilities in Klang, namely Factory 30 (operational in July 2017), Factory 31 (operational by January 2018) and Factory 32 (operational by December 2018).

By December 2018, the group is projected to have 31 glove factories, 628 production lines and a production capacity of 59.7 billion gloves per year.

Manufacturers seem generally unfazed by the rising costs and are confident that their competitiveness will remain unaffected, as they move forward with their expansion plans.

Overall, it looks as though glovemakers will sail through the current storm, with their earnings cushioned from the impact of rising costs and the weaker US dollar, by robust and inelastic demand.