Glove makers are anticipated to continue facing challenges, say analysts.
PETALING JAYA: The operating environment for glove manufacturers is turning positive, which will enable them to narrow their losses and improve profitability.
Nevertheless, they are anticipated to continue facing challenges, say analysts.
HLIB Research turned positive on the sector, upgrading its view to “neutral” from “underweight”, given what it views as a more conducive operating environment for glove makers.
This follows the end of inventory drawdown by buyers and narrower pricing gap between local and Chinese manufacturers.
The research house explained that the overall operating environment for glove makers is showing signs of improvement, as the excess inventories of glove buyers significantly reduces and the price gap between local and Chinese manufacturers narrows. These factors have resulted in glove manufacturers experiencing an uptick in orders.
In addition, the initiatives by manufacturers to permanently and/or temporarily decommission less efficient plants is yielding positive results, leading to improved utilisation rates and lower fixed costs.
“This, in turn, translates to narrower losses and improved profitability. Observing the improving trend in the operational landscape, we upgrade our rating on Hartalega Holdings Bhd
to “hold” from “sell”, while maintaining our “hold” recommendation for Top Glove Corp Bhd and Kossan Rubber Industries Bhd.
“With that, we also upgraded our sector rating to “neutral” from “underweight” previously,” the research house said.
However, it believes despite the current more favourable circumstances, which allow glove makers to be able to negotiate for price increases, it remains unlikely for glove makers to pass on the entire cost increase to their customers.
Instead, price hikes are expected to align with movements in raw-material prices, it said.
In the first half of 2023, the average selling prices (ASP) of gloves rose from US$17 per 1,000 pieces to US$21 per 1,000, on the back of rising raw material and fuel costs.
However, HLIB Research said with persistent demand-supply imbalances and buyers still in the process of depleting existing stockpiles, sales volumes of glove manufacturers saw a decline.
As such, this led to a reduction in plant-utilisation rates, falling to the range of 35%-45% for local glove makers.
The significant spike in ASP pushed buyers to turn to Chinese glove makers, prompting Malaysian manufacturers to adjust prices to narrow the pricing gap.
The move saw the performance of local glove players improving as utilisation rates were better, following glove makers’ decisions to reduce capacity.
Thereafter, manufacturers were able to implement smaller price increases in the second half of 2023 and these adjustments appeared to be more sustainable.
This was supported by several factors such as buyers having significantly drawn down their excess stockpile, higher raw-material prices and narrower pricing gap between local and Chinese manufacturers, amounting to about US$2-US$3 per 1,000 pieces.
In response to the stark supply-demand mismatch in the industry, glove makers under its coverage implemented capacity-rationalisation measures to address an inefficient cost framework, HLIB Research said.
“This strategic initiative, combined with the improving demand, has facilitated both Hartalega and Kossan in returning to profitability in the most recently reported quarter.
“However, given Top Glove’s relatively larger capacity of 65 billion pieces pa year versus Hartalega’s 42 billion pieces a year and Kossan’s 25 billion pieces a year, it is anticipated that Top Glove may continue to report losses in the first half of 2024, albeit on a smaller scale,” it added.
