It said on Wednesday exports to Europe were under threat as China’s glove manufacturers are expected to reroute their glove exports to Europe in view of the trade sanctions.
However, local glove manufacturers would need to price their products competitively to defend their market share in Europe.
“Declining rubber latex price as well as on-going effort to install more efficient production lines is expected to further reduce production cost,” the research house said as it maintained its neutral stance on the sector.
MIDF Research noted that from the recently concluded 2QCY19 earnings season, sequential earnings growth was weaker for Top Glove Corporation Bhd (Neutral, TP: RM4.70), Kossan Rubber Industries Bhd (BUY, TP: RM4.64) and Supermax Corporation Bhd (BUY, TP: RM2.07).
This was due to the abrupt upward movement in the rubber latex price by about +23.0% qoq to RM5.00/kg.
Consequently, profit margin was eroded as natural rubber glove was of a sizeable percentage of total production volume.
In addition, profitability was adversely impacted due to the time lag of two to three months before the higher cost can be passed to consumers causing a mismatch between raw material costs and selling price.
“However, we observed that rubber latex price has eased by -12.0% qoq to about RM4.40 a kg. Hence, we expect a lower cost of production going forward.
“Effective from Sept 1, 2019, the US government had imposed a 15% tariff on medical gloves made in China. This is in addition to the 25% tariff imposed previously on industrial glove made in China.
“As a result, US importers are shifting the source of supply for medical and industrial glove from China to glove manufacturers in the Asean region specifically Malaysia, Thailand, Indonesia and Vietnam.
“The imposition of tariff on medical glove from China is expected to have a positive impact to the top four local glove manufacturers in the near term given their focus on producing medical glove (more than 90.0% of production volume) and established presence in the US market (more than 30.0% of total revenue). Note that the US imported about 10% of its glove from China,” it said.
MIDF Research gathered that the uncertainties on tariff imposition resulted in glove importers to hold back on their purchasing decision previously. Due to this, total export of natural and nitrile glove decreased by -4.4% yoy to 38.7 billion pairs in the 1HCY19.
Nonetheless, it expects a better 2HCY19 as the demand normalise. Note also that the total annual production capacity of the top four manufactures is expected to increase to about 160.0b pieces by the end of CY19 (+9.0% yoy).
This is after taking into account the reschedule in capacity expansion plan of about 6.0b of capacity in CY19. Hence, the additional capacity will be matched by an elevated demand from the US at least until the next US presidential election in November 2020.
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