Rubber firms unfazed by rising costs


  • Business
  • Monday, 11 Jul 2005

BY HANIM ADNAN

WHILE most rubber industry players are struggling to survive the impact of rising costs, given escalating prices of basic raw materials like SMR 20 and bulk latex, several listed rubber product companies contacted by StarBiz have expressed optimism they would maintain their net profit margins going forward. 

Tai Boon Wee

Industry players and analysts concur that those badly affected would be the small and medium-sized industries (SMIs), which do not have the efficiency and volume to operate in an increasingly competitive environment. 

A commodity analyst said: “Many rubber-based SMIs are facing margin pressure as they cannot absorb the cost increases in fuel, chemical, packaging and logistics over the past two years. However, industry giants – mostly public listed ones – are well prepared to take up these tough challenges.” 

The SMR 20 rubber price is currently trading at its nine-year high, touching almost US$1.40 per kg compared with 52 US cents per kg - its lowest price in 30 years - registered in year 2000.  

“As a commodity, rubber is even more volatile (in terms of price) than crude palm oil, which has stabilised between RM1,300 and RM1,400 per tonne this year,” the analyst added. 

The total rubber products sector in Malaysia comprises about 345 manufacturers of a wide range of products, including tyres, latex-based products, footwear, industrial rubber goods, and general rubber goods. 

Makers of latex-based products, particularly rubber gloves, were the largest consumer of the country's 1.17 billion tonnes rubber produced last year, followed by the tyre and footwear sectors, according to the Malaysian Rubber Board (MRB). 

In the case of rubber gloves where Malaysia is the market leader with about 60% share of total world market, commodity analysts expect there will be more room for growth for big players like Top Glove Corp Bhd, Supermax Bhd, APL Industries Bhd and Kossan Rubber Industries Bhd

Datuk Dr Lim Wee-Chai

“These companies have not slowed down, and many have increased their capacity over the past three years. APLI, for example, has even expanded to Vietnam in an attempt to bring down costs,” a Singapore-based brokerage said in its latest research notes. 

It said efficient rubber glove players were well-rewarded as many had racked up commendable compounded annual growth rates (CAGRs) in excess of 30% over the past five years. 

With rubber gloves increasingly becoming a commodity, the brokerage said, companies were trying to differentiate themselves by way of own brand manufacturing, which enables them to bypass the distributors and boost margins as well as introduce higher value products, thus giving them better bargaining power.  

“This has enabled local market players to stay on top of the competition from neighbouring countries like Thailand and Indonesia,” it added. 

The brokerage also expects further consolidation among the rubber glove players due to margin compression, tougher regulations by importing countries, higher latex prices and buyers' preference for larger suppliers. 

“The winners from the shake-up in the rubber glove industry are the efficient industry giants whose capacities have doubled or tripled over the years,” it said. Over the past five years, 29 rubber glove players have closed shop or been bought over, taking with them about 12% of the global capacity.  

There are now 80 players in the rubber glove industry, of which nine are public listed companies. The brokerage expects the industry's second phase of consolidation to result in only about 20 large players in the foreseeable future. 

Makers of latex-based products, patrticularly gloves, were the largest consumer of Malaysia's 1.17 billion tonnes of rubber produced last year.

Top Glove executive chairman Datuk Dr Lim Wee-Chai, in a reply to StarBiz query, said: “As latex/rubber is a commodity, we have accepted the fact that there will be days when commodity prices will be up or down and we must learn to manage this.” 

“For Top Glove, we are in a unique position as we have been able to pass the majority of the anticipated increases in cost to our customers. However, when the latex/rubber price falls, we will also pass on the cost savings to them,” added Lim. 

He said latex represented about 50% of Top Glove's manufacturing cost and this raw material was sourced from eight suppliers in Malaysia and Thailand.  

“To a certain extent, we will also be affected by the current escalating latex/rubber price,” he said, adding that by increasing efficiency and production capacity, Top Glove managed to control its semi variable and fixed costs efficiently.  

“Thus we are confident that we will be able to maintain our net margin going forward,” Lim said.  

The company also does not anticipate its financial performance to be affected this year due to its well-planned strategic measures. Top Glove, the world's largest glove maker, aims to double its existing global market share to 24% by 2007. 

“We feel that we are in a strong financial footing. In fact, our latest third quarter results year-to-date have surpassed our 2004 full-year results,” he added. 

Goodway Integrated Industries Bhd – one of Asia's leading rubber compound manufacturers – said the rising costs and tightness in the supply of raw materials was a global issue that concerned all similar manufacturers. 

“In view of the current escalating rubber prices, the manufacturers' profit margins will initially be affected. But it will only be a matter of time before manufacturers pass on the increase in costs to customers to re-establish profit margins,” said chief executive officer and managing director Tai Boon Wee. 

Nevertheless, he said, the general demand for rubber products would continue to grow due to robust car sales in China and India, rapid increase in the building of roads and highways and continued infrastructure development in Asia.  

“All these positive developments will more than compensate for the squeeze in profit margin,” Tai added. 

Goodway would not be any worse off than the other manufacturers, he said, adding that the company was slightly affected by high raw material costs but was able to eventually pass it on to customers due to its established brand in the market.  

Tai said the cost of natural rubber represented less than 20% of the company's operational costs. 

To counter the increase in raw material costs, he said, Goodway was continuously looking at expanding into new markets such as Europe and the US as well as introducing new products such as off-the-road tyres that offer good profit margins. 

“We will also enhance our distribution network, intensify brand awareness, go into downstream business and continue to invest in research and development,” he added.  

 TOPGLOV :  [Stock Watch]  [NewsGOODWAY :  [Stock Watch]  [News]

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