Analysts positive on rubber glove sector’s prospects, but wary of possible supply glut

KUCHING: Malaysia’s glove sector’s prospects are bright, underpinned by the expanding healthcare sector globally but analysts are mindful of a potential supply glut that could cut into glove makers’ margins.

The research arm of AmInvestment Bank Bhd (AmInvestment) pointed out that the sector’s prospects are driven by the expanding healthcare sector globally, both public and private, as well as the rising hygiene standards across the industries that drive the demand for gloves over the long term.

“The Malaysian Rubber Glove Manufacturers Association (MARGMA) projects the global glove demand to grow by eight to 10 per cent per annum in the coming years.

“Over the immediate term, Malaysian glove makers will also continue to benefit from the glove supply shortage in China, following the massive shutdown of vinyl glove factories in China recently due to environmental issues (the phasing out of the highly polluting coal-fired boilers),” it said.

However, it cautioned of a potential supply glut “at some point”, as most glove sector players have embarked on aggressive capacity expansion in recent years.

“This could end in severe price undercutting that would hurt margins,” it warned.

It estimated that the combined production capacity of the Big Three – Top Glove, Hartalega and Kossan – would expand by a whopping by nearly two-fold, or 17 per cent to 121 billion pieces annually in 2018, compared with a 7.5 per cent growth in 2017.

“Also, with input costs denominated largely in ringgit while export sales in US dollar, glove makers stand to lose from a strengthening ringgit – a reversal from the windfall they enjoyed due to the weakening ringgit in recent years.”

Meanwhile, it noted that glove makers generally have been able to pass on the higher or lower production cost to their customers in the past, subject only to a time lag.

“We expect latex prices to remain soft in 2018 as the growth in natural rubber production globally continues to outpace demand. According to the Association of Natural Rubber Producing Countries (ANRPC), during the first 10 months of 2017, global natural production grew by five per cent year-on-year to 10.4 million tonnes, while world demand for natural rubber only inched up by 1.1 per cent y-o-y to 10.7 million tonnes.

“Similarly, as nitrile prices track closely that of latex, we expect nitrile prices to stay soft in 2018 as well. Latex and nitrile typically account for 45 to 55 per cent of total glove production cost,” it added.

However, the research team expected higher costs in 2018 for gas (based on the RM1.50/mmBtu hike semi-annually under the gas subsidy rationalisation scheme, and assuming no rebate under the Gas Cost Pass Through mechanism), chemicals (in tandem with higher crude oil prices) and labour (potentially another hike in the minimum wage, the increase in foreign worker levy from RM1,200 to RM1,850 and the new rule mandating employers to absorb the levy).