THE rubber glove sector should continue on its smooth-sailing path driven by robust earnings outlook, given that capacity in the sector is still below market demand.
Also, the sector will continue benefiting from a strengthening US dollar as sales are denominated in the currency while only half of its production costs are US dollar denominated.
Local glove players’ operating efficiency is foreseen to improve as they focus on increasing automation for better yield and reducing labour dependency.
Additionally, higher healthcare expenditure will boost demand for gloves and growing glove consumption per capita.
Analysts expect demand for rubber gloves to expand by 8% to 10% backed by the increase in healthcare expenditure particularly in Asian countries.
In the first half of 2015, Malaysia shipped out 52 billion gloves, an increase of 16.2% year-on-year from 44.7 billion pieces in the first half of 2014. Malaysia exported 28.5 billion pieces and 23.4 billion pieces of latex and nitrile gloves respectively in the first half of 2015.
In the first nine months of 2015, the rubber gloves sector posted an average 38.4% year-on-year core net profit growth, following an 11% decline in 2014. This was mainly due to additional capacity expansion driving the higher glove shipment volume and better operating efficiency from automation and faster lines.
However, these benefits could be offset by softer raw material and lower average selling prices.
“We are optimistic on the sector as glove players are now bearing fruits of their respective cost-optimisation measures in recent years, evidenced by the double-digit margins they’re still enjoying amid softer raw material prices and lower average selling prices,” says PublicInvest Research in a note.
It is not overly-concerned on oversupply issues as Malaysia only constitutes about 60% of world rubber glove demand while incoming capacities are in stages. Malaysia has been the world’s top supplier of rubber gloves for almost two decades.
CIMB Research expects the sector to post 17% earnings growth in 2016 on additional capacity to meet demand especially in the nitrile segment.
“We expect the sector to add 13 billion to 14 billion more in production capacity per annum in 2016, still below market demand growth of 17 billion to 18 billion gloves per annum. Hence, we do not expect any excess capacity issues in 2016 given the resilient demand outlook,” it says.
New capacities from Kossan Rubber and Top Glove Corp have come on-stream, while Hartalega has delayed its Plant 1 and Plant 2 for two months to install a new device design aimed at helping to reduce operational costs over the longer term.
PublicInvest is not overly concerned of any potential rubber glove glut considering potential delays in the construction of new plants.
“Hence, we see growing capacity continuing to be absorbed by the circe 8% demand growth per annum,” it says.
CIMB meanwhile sees global demand for nitrile gloves exceeding the demand for natural rubber in the future, due to its effectiveness in addressing the protein allergy requirement in the North American and European markets.
Natural rubber prices have dropped to an average of RM4.19, from RM8.93/kg in 2011. Year-to-date, it has fallen about 4.1%, possibly due to slower demand for natural rubber.
“Thailand, the largest natural rubber export country, has seen stocks piling up alarmingly to 489,052 tonnes as at September 2015 while rubber production of Association of Natural Rubber Producing Countries (ANRPC) members who account for more than 90% of world supply dropped 0.9% year-on-year as most rubber tappers move on to other higher-margin businesses,” says PublicInvest.
Thailand is seeking to reduce its stockpiles by constructing rubberised roads and securing a supply contract from China Sinochem while Malaysia has proposed a similar plan in using natural rubber for the construction of roads which is expected to start next year.
It added that natural rubber prices should stabilise at current levels given the increasing usage of rubber, rising demand from China and weaker rubber production.
CIMB is overweight on the sector given the attractive earnings growth outlook, while PublicInvest is neutral on the rubber glove sector as it believes the major growth prospects have already been priced in.