In a report yesterday, the research house said concerns of a prolonged competitive pricing environment have turned into a reality check, as the incoming supply of gloves is currently pacing ahead of global demand growth.
CIMB Research said in light of the increased production capacity of nitrile butadiene rubber (NBR) gloves, it believes pricing pressure will intensify, which could lead to short-term margin compression for the glove makers.
“While we expect glove makers to increase NBR gloves prices in the upcoming quarter, we believe this is solely to pass on the extra operating costs (weaker U.S. dollar and higher raw material prices),” it said.
“All in, we foresee margin pressure impacting all glove makers, particularly those with larger production capacities,” said the research house.
Furthermore, taking into account heightened competition, CIMB Research believes the ease of passing through costs is diminishing.
“While glove makers were previously able to enjoy passing on costs effectively, with only a minor time lag, we believe that the tides may have turned, as supply grows ahead of demand. Glove makers would have to now potentially (to a certain extent) sacrifice margins to absorb some, if not all the additional costs to remain competitive.”
CIMB Research also said that according to its case study on the dynamics of global glove supply and demand, it showed that a supply glut may occur in 2016 to 2017, before demand eventually catches up in 2018.
“Our calculations reveal a surplus of 0.3 billion pieces per year in 2016 and 3.0 billion pieces per year in 2017. Nonetheless, we expect the demand/supply dynamic to a slight deficit of 0.3 billion pieces per year in 2018, as demand catches up. Note that, this is under the assumption that there are no delays in expansion plans and/or stronger-than-average demand growth,” it pointed out.
However, CIMB Research said the glove sector’s long term prospects remain intact.
The research house said glove makers may take counterintuitive measures in the current environment by slowing down commercialisation of new capacity, revamp existing lines and/or shut down older plants.
“In turn, this increases the overall efficiency of the Malaysian glove sector and reinforces its dominance globally. We also foresee Malaysia’s exports to grow at above-average rates, given its leading position and higher operating efficiencies versus other countries.”
As the research house downgraded the glove sector, it also downgraded Hartalega Holdings Bhd from “Hold” to “Reduce”, given the recent increase in share price.
“The top picks of the sector are Kossan Rubber Industries Bhd and Supermax Corp Bhd. Upside risks include sharp appreciation in U.S. dollar/ringgit, while downside risk is a spike in raw material prices,” it added.