RHB Research expects glove makers’ profitability to recover year-on-year by end-2024.
PETALING JAYA: The recovery of the Malaysian rubber glove industry remains uneven, as indicated by April’s weak export data, says RHB Research.
According to the research firm, this implied that demand has still not caught up to industry expectations of inventory normalising to pre-pandemic levels.
Nonetheless, the gradual improvement in market dynamics should offer a respite for local glove manufacturers, RHB Research said in a report.
RHB Research noted that industry blended average selling price (ASP) stabilised to US$20 to US$21 (RM93 to RM98) for 1,000 pieces as prices began improving in the first quarter of 2023.
“On a positive note, local and regional glove makers are still keen to pass on their cost increases to customers, to ensure their own long-term sustainability. The quantum of ASP hikes varies across different players, so we believe that glove makers will not likely raise prices aggressively, as this would lead to them sacrificing sales volume.”
The price gap between Chinese and local glove makers has also narrowed to US$3 (RM14), from US$5 (RM23) previously.
Malaysia’s glove export volumes contracted 35% month-on-month (m-o-m) in April, after growing by 10% m-o-m and 8% m-o-m in February and March.
“A similar trend was seen in China, where the export volume fell by 17% m-o-m.
“We expect the demand for gloves to pick up gradually in the second half of 2023 (2H23).
“This is as client inventory levels continue to decrease – on top of the fact that their glove inventories (that were stockpiled since 2020) are approaching their expiry dates,” it added.
According to the research firm, rubber gloves have a typical shelf life of three to five years.
Given the lack of clarity on demand for 2023, RHB Research said it now expects global demand to contract by 5% year-on-year to 379 billion pieces.
On the supply side, it expects negative industry supply growth of circa 53 billion for 2023 – with 40 billion less pieces from Top Glove Corp Bhd
and 13 billion less pieces from Hartalega Holdings Bhd.
“Glove makers were said to have phased out their obsolete production line to curtail cost pressures.
“Our industry annual supply assumption is now 370 billion.
“Capacity rationing (given the industry’s low utilisation rate of 30% to 40%) could lead to better operating efficiency; as the obsolete plants are less energy and manpower efficient,” said RHB Research.
Given these factors, RHB Research is keeping its “neutral” weighting unchanged based on the expectation of costs normalising by end-2H23 because of lower gas tariff rates and the implementation of cost pass-through initiatives.
“However, our outlook remains conservative as we have yet to see further clarity on demand for 2023.
“We expect the better demand visibility and favourable cost outlook in 2024 to provide some headroom for margin expansion,” it said.
That said, RHB expects glove makers’ profitability to recover year-on-year by end-2024.
The consistency of order replenishment and gradual improvement in industry utilisation rates will be key re-rating catalysts for the near term.
Key downside risks include weaker-than-expected demand (dragged by excessive supply capacity) and higher-than-expected operating costs.
