Raw material prices marred earnings of glove producers
KUCHING: A huge price leap in raw materials has marred earnings of glove producers, resulting in an unexciting first half of 2017 (1H17) in the rubber glove industry as many players struggled to meet market expectations.
Based on the recently-concluded earnings season, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) noted that earnings of only half of glove manufacturers under its coverage managed to meet with expectations.
“Of the four glove manufacturers under our coverage, Hartalega Holdings Bhd (Hartalega) and Kossan Rubber Industries Bhd ( Kossan) managed to record earnings within our expectations.
“However, earnings from the remaining two – Top Glove Corporation Bhd ( Top Glove) and Supermax Corporation Bhd ( Supermax) – came in below expectations,” shared the research arm.
The lacklustre performance was due to higher raw materials prices during 1H17 of which natural rubber was a key contributor to.
Natural rubber stood out the most as it was observed to have more than doubled in price from its average of RM3.56 per kg back in February 2016 to as high RM8.16 per kg as recorded on February 2, representing an increase of 129 per cent.
The increasing trend of natural rubber prices has been most contributed from an increase in passenger car demand in China since last year, but the increasing trend is expecting to continue going forward due to an expected decrease in total rubber output from the Thai rubber plantations in the coming year.
“The price of natural rubber will continue to increase even further earlier this year due to the unseasonal flash flood that hit southern Thailand, the country’s main rubber growing region, late last year. The event has applied further upward pressure on natural rubber prices,” explained the research arm.
Thai officials have stated that they are anticipating a 10 per cent reduction in total rubber output in 2016-2017.
That being said, MIDF Research is opining that natural rubber prices will continue to trade between the average ranges of RM6 to 8 per kg for 1H17 but expect prices in April and May to be in the high ranges of RM8 per kg due to the annual wintering season taking place currently that causes rubber supplies to be lower seasonally.
The high rubber prices are however, not expected to prevail throughout the year due to a slowing demand from China’s automotive industry as Chinese authorities have since increased China’s passenger car purchase tax to 7.5 per cent in 2017 from 5 per cent in 2016.
“This will reduce the double digit growth experience by China’s automotive sector last year to a single digit growth this year according to industry officials.”
Despite a rather gloomy outlook on raw materials costs, there seems to be a silver lining as other operational costs have gained increased visibility such as gas prices whereby uncertainties in gas prices were alleviated following announcements from Gas Malaysia Bhd on the quantum of gas price increases that will take place going forward until 2019.
Additionally, fears of increased costs in labour have also been eased in the near to mediumterm with the deferment of the implementation of levy payment on foreign workers by employers, to next year instead.
“The reduced uncertainties of future cost increases have led to the price competition between glove producers to have finally abated, and as such we opine producers will now be focusing on volume and lean manufacturing to drive revenue growth instead,” guided the research arm.
All factors considered, the research arm is expecting the rubber gloves sector’s performance to be positive in the long-term but challenging in the near-term.
Near- term challenges are largely due to capped upside earnings potentials derived from unfavourable currency movements and adverse raw material price fluctuations, while long- term catalysts include a potential growing global rubber glove demand due to changes in regulatory compliances in China and the US.
In China, its newly signed Paris Climate Agreement which will enforce stricter environmental policies for its industries, are set to drive up costs for their vinyl plastic gloves manufacturer and will likely drive up prices of vinyl plastic gloves globally given their status as the largest producer of vinyl plastic gloves.
US authorities on the other hand have just announced that they will be implementing a complete ban on powdered medical rubber gloves due the protein content found in its powder being potentially harmful in causing allergic reactions.
The two developments are expected to drive demand up for natural rubber gloves and nitrite gloves as both countries start to seek cheaper or more viable alternatives.
“Hence, we are maintaining our ‘Neutral’ stance on the sector in view of the near term challenging operating environment as well as the lack of strong catalyst at this juncture,” justified the research arm.
Hartelaga and Kossan remain top picks of MIDF Research due to their earnings visibility prudent management, superior profit margins for Hatelega and increased production capacity for Kossan.