Passing on rising costs to customers

GLOVE makers faced a triple whammy last year in the form of higher latex price and an upward revision in gas and power rates. To offset the rising production cost, they raised the prices of their products three times.

The ability to pass on the higher cost to consumers without expecting it to dent sales volume is one of the main factors that makes the rubber glove industry highly resilient.

“As glove is a necessity, it is easier for us to pass the extra cost onto the customers,” says Top Glove Corp Bhd executive director Lim Cheong Guan, pointing out that the company managed to pass on 70%-80% of the higher costs last year to end users. Another reason that has helped smooth out this process is that Top Glove’s huge customer base, makes it easier for it to negotiate a price revision.

For Top Glove, latex concentrate makes up the largest cost component at about 52% of total manufacturing cost. Latex prices reached a peak of RM7.20/kg in July last year and has since come off to below RM4 early this year. In addition, the Government had raised natural gas prices by 72% in August last year but has since revised it downwards by 32%.

Since then, however, glove prices have eased with natural rubber gloves currently at US$24 per 1,000 pieces compared to US$30 per 1,000 pieces at end-2008. The price of synthetic rubber gloves, which constitutes 22% of global consumption, has also eased from US$36/1,000 pieces as at end-2008 to US$30/1,000 pieces currently.

Similarly, another major glove player Kossan Rubber Industries Bhd was also able to pass on the higher cost to its customers, only this time, it passed on 100% of the additional costs.

Kossan group corporate affairs senior manager Edward Yip says gloves can be considered something of a commoditised product; its pricing mechanism very much follows the fluctuation in raw material and energy costs.

“When latex price and energy cost is moving up, extra cost (only the extra production cost – not including profit portion), will be passed on to buyers and it is acceptable as long as manufacturers are able to justify that move.

“Kossan applies cost plus strategy, which means, when latex price and energy cost increases, we will pass on and when it is easing off, we will also reduce the prices. This model has worked well for us for many years, especially when dealing with multinational corporations in the West. This could be different when you sell to less developed or developing countries.”

An analyst points out that if prices fall in the short term, Kossan will be able to benefit but if prices keep on rising, the company stands to lose out depending on the lead-time of contracts.

Supermax Corp Bhd executive chairman and group managing director Datuk Seri Stanley Thai opines that while price fluctuations in commodities are routine issues as they are cyclical, of bigger concern are rising utility prices and competition from China.

“Volatility of latex raw materials and foreign exchange are part of the routine work for glove manufacturers to monitor. The higher the volatility, the more frequency of glove price adjustments. It has become a norm for glove manufacturers, importers, distributors to adjust glove prices according to the volatility of latex prices and fluctuation of foreign exchange.”

However, he says the increase in natural gas prices, water and electricity tariffs will have serious impact on global competitiveness of made in Malaysia products and services, and that includes the latex examination gloves industry.

“The imposition of double levy on foreign workers currently put ‘on hold’, if implemented, will add further burden on the global competitiveness of the glove manufacturers operating in Malaysia. Currently, synthetic nitrile PF gloves made in China are more competitive than Malaysian-made nitrile gloves, while China’s synthetic vinyl PF gloves are much more competitive than Malaysia’s latex PF gloves, especially in the industrial and food services sectors,” says Thai.

Related Story: Synthetic compared to natural rubber gloves

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