Rubber glove makers to gain from lower rates
PETALING JAYA: A reduction in natural gas tariff rates from January to June 2017 is expected to benefit the rubber glove players as energy costs account for 10%-12% of total costs, according to analysts.
Gas Malaysia Bhd had announced that the Government approved the revision of the natural gas tariff for the non-power sector in Peninsular Malaysia from Jan 1, 2017 to Dec 31, 2019.
Since energy costs account for 10%-12% of total costs for the major glove players, the expected reduction through the tariff rate revision, would reduce cost pressures in the short-term, said PublicInvest Research in a report.
“Under the Gas Cost Pass Through (GCPT) mechanism, a tariff rebate of 40 sen per one million British thermal units (MMBtu) will apply to all tariff categories for the period beginning January to June 2017.
“This translates to an average effective tariff of RM26.31/MMBtu, which is a reduction of 2.74% from the previous average tariff, hence relieving some cost pressures for the glove players while getting ready for the following adjustments going forward every six months,” said the research house in its note yesterday.
However, PublicInvest expected the rubber glove sector to face challenges in 2017. They are compressions in average selling prices, continued competition as well as the difficulty to pass on costs of higher raw materials from the strong US dollar-ringgit exchange rate anticipated in 2017.
A surge in raw material prices, spurred by China’s double-digit growth in vehicle sales as well as upward cost pressures from natural gas hike and labour cost would continue to exert pressure on the sector. Tariff rebate:
“We remain neutral on the sector, with Kossan Rubber Industries being our favourite pick for its prudent expansion plans, its continuous efficiency enhancement initiatives and roll-out of new products,” said the research house.
Meanwhile, Alliance DBS Research said that for the other upcoming hikes, it anticipated that the impact on glove players would likely be minimal.
This is premised on the option glove players have to further tap into alternative sources such as biomas and that the bulk of the higher natural gas costs should eventually be passed on to customers under the cost pass through mechanism.
However, price adjustments may occur with a time lag of one to two months, it added.
“Based on our sensitivity analysis, a hike of 5% will only impact glove players’ earnings by 2%-3% if it is absorbed fully,” it noted its report.