Lower gas prices to benefit glove makers

CIMB Research expects Hartalega to remain the market leader in the rubber gloves sector due to its strength in product and engineering innovations.

KUALA LUMPUR: 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, PublicInvest Research said.

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.

“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 6months,” said the research house in its note.

However, PublicInvest expects the rubber glove sector to face challenges in 2017. The factors 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.

“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 PublicInvest Research.