CAN it be that the stock market’s love affair with rubber glove manufacturers is on the rocks amid signs that there will be no repeat of the industry boom like last year?
In addition to the slower demand growth in the rubber glove industry, analysts expect additional headwinds in the form of the weak US dollar and higher latex costs.
The share prices of the major glove makers has dropped significantly recently. Top Glove Bhd closed at RM6.20 yesterday, 14.4% lower than its highest on July 15 this year; Supermax Corp Bhd dropped from its highest of RM6.55 on July 19 to RM5.99, Kossan Rubber Industries Bhd was down 45 sen, compared to its highest of RM4.25 this year while Hartalega Holdings Bhd slipped 61 sen to RM7.84, from its highest of RM8.45 this year.
The demand of rubber gloves rose tremendously last year with a growth of about 18% due to the flu outbreak that pushed up the demand in healthcare industry, compared to its normal 10% growth previously.
The companies share prices grew hugely from last year to July supported by growing demand and the bright outlook of the healthcare industry.
Compared to its share prices on last trading day of last year with its highest point this year, Top Glove has grown 44.7%, Supermax grew 74.5%, Kossan jumped 56.5% while Hartalega has rose 35.9%.
However, analysts said the “good scene” for glove makers has come to an end as the flu outbreak is under controlled now, which caused a lower demand.
AmResearch Sdn Bhd maintains its forecast of overall demand growth for the glove industry at a steady 8% to 10% per annum, in line with the industry’s historical organic growth rate.
The industry grew a strong over 10% year-on-year back in 2009.
“The industry is reverting to a normalised trading cycle, with further contraction in quarter-on-quarter order lead-time from 50 days to 40 days, compared to 80 to 90 days during flu outbreak,” it said in a report.
It said the management attributed this partly to a more conservative inventory management due to high latex costs but the research house reckons that order cutbacks suggest subdued long-term demand growth going forward.
“This stems from our belief that usage of rubber gloves for health protection purposes should be relatively inelastic, given a lack of available substitutes,” it added.
Beside weaker demand, the increased manufacturing capacity had also caused worry in the industry.
An analyst with a local research house told StarBiz that the demand was normalising now due to the increased manufacturing capacity.
“Demand for rubber gloves is always steady and the flu outbreak did not really push up demand that much,” she said.
HwangDBS Vickers Research said new capacity coming on-stream made the slowdown in demand worst and it expected Top Glove’s utilisation rate to fall below 75% when factories 18 and 21 start operating at the end of this year.
Besides, the ringgit, which had strengthened more than 8% against the US dollar since the beginning of the year, is placing more pressure on glove manufacturers’ margins.
AmResearch said glove makers were also suffering from higher latex price, adding that the price of latex remains high, averaging RM6.93 per kg as at July.
“Despite marginal retreat from its all time high of RM7.56 per kg in April, current latex price is largely unchanged, which is similar to levels seen during the 2008 commodities rally,” it said.
It said manufacturers were of the view that the end of a “wintering” season for rubber trees would see price of latex easing.
However, the research house was less optimistic as major rubber producing countries continue to experience unfavourable weather conditions and appetite from the automobile industry in China and the US continues to be strong.
A more optimist CIMB Research was confident that demand growth in rubber glove industry was strong enough to absorb the new capacity and the glove makers’ pricing power would allow them to pass on cost increases.
The research house mentioned that the sector remained an “overweight” and all the glove stocks under its coverage remain outperforms.
“Factors that could catalyse the sector include the continuing uptick in demand from the healthcare industry, capacity expansion and strong earnings growth,” it said.
The research house did not think that the massive capacity expansion plans by glove companies would be an issue as demand for rubber gloves remains resilient.
“Slight excess capacity is not uncommon as traditionally glove makers operate at 70% to 75% utilisation rates instead of the full capacity seen over the past year,” it said.
The analyst from CIMB said: “We are not unduly worried on the weaken US dollars as this is not the first time that glove manufacturers are facing this situation. Like in the past, average selling prices can be adjusted for higher cost and weaker US dollar and unfavourable trends have only a temporary effect.”
Besides, the analyst said the recent move by the government to cut subsidies for fuel and sugar has stirred fears that power subsidies could be the next target.
“As natural gas is the main source of energy for rubber glove manufacturers, a rollback of this subsidy could lead to earnings and margin squeeze. But again, the higher cost can easily be passed down as it represents just a small portion of total costs, i.e. 8% compared to 56% for latex,” she said.
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