Not quite a turnaround yet for glove makers

KUALA LUMPUR: In a market that saw the FBM KLCI surge 1.3%, stocks of glove manufacturers topped the losers’ list yesterday. This marked a sharp reversal from Tuesday when these stocks were the top gainers amid a weak equity market.

Among the major losers, Top Glove Corp Bhd fell 22 sen to RM4.16, Supermax Corp Bhd declined 15 sen to RM3.13 while Kossan Rubber Industries Bhd was down nine sen to RM2.79. For many analysts, the reversal of gains for these stocks came as no surprise.

While the weakening ringgit against the US dollar and declining natural rubber prices are seen as a respite for glove manufacturers, analysts and industry players are still not convinced that a positive turnaround is around the corner for the industry.

This is because the sector is still plagued by an oversupply of natural rubber gloves amid weak demand, and that latex prices are still deemed to be on the high side compared to the previous year. Latex accounts for more than half of glove manufacturers’ cost structure.

“There is no re-rating of the industry at the moment. It is all about supply and demand,” MIDF Amanah Investment Bank Bhd analyst Elina Hashim recently told The Edge Financial Daily. The analyst has an “underperform” call on the sector.

Over the past year or so, the multiple threats of a strengthening ringgit against the US dollar and costlier latex, against a backdrop of weaker demand and overcapacity environment for natural rubber gloves, were crucial issues for glove players.

The general view is that these dynamics would translate into thinner margins for glove producers as weaker demand and excess production capacity mean players are finding it more difficult to pass down the expanded costs to buyers.

This is because buyers are not in a hurry to replenish their natural rubber glove inventory as the risk of supply shortage is low under the current landscape.

Fears of a recession in the US and Europe have since changed the landscape as far as the currency and latex costs are concerned, but that has only heightened demand concerns.

Over the last six months, Malaysian natural rubber prices had declined 26% to RM8.13 a kg yesterday from a high of RM10.93 a kg on April 11. The fall in natural rubber prices is in tandem with a decline across commodity prices on concerns of weaker demand during a global economic slowdown.

The ringgit had weakened to 3.1774 yesterday versus the US dollar from its strongest point of 2.9390 seen on July 27. The US dollar has regained its strength as global investors flocked to the greenback as a safe haven and unwind their US-dollar carry trades.

World rubber glove demand is seen at some 150 billion pieces this year, and is expected to register an annual growth of between 8% and 10%, according to industry players. Malaysia is the world’s largest rubber glove producer, accounting for about 60% of the global pie.

Kossan senior manager for corporate affairs Edward Yip said while the ringgit had weakened and natural rubber prices had fallen, the degree to which glove manufacturers would benefit depended on their product mix and markets.

Citing examples, Yip said producers of natural rubber gloves for the lower-end segment in emerging markets, which are more price-sensitive, might have to pass down their cost savings immediately now especially in an oversupply environment.

This is because buyers would now have more choices to secure these products from manufacturers which could offer the most competitive prices, he said.

“The price adjustments were not so fast when there was no overcapacity,” Yip said. “However, the overall situation is good for everyone,” he added.

For high-end gloves catering to developed markets such as the US and Europe, he said cost savings would still be passed down to these quality conscious but less price-sensitive buyers.

“However, the pricing is more stable,” Yip said.

Meanwhile, Top Glove Corp Bhd managing director KM Lee had said that while the weakening of the ringgit augured well for glovemakers, there is still stiff competition in the sector and not all the producers are running at full capacity currently.

the day for rubber company.......is over for this week...