Glove demand-supply imbalance to normalise


  • Analyst Reports
  • Wednesday, 08 Jul 2020

“However, glove demand is inelastic. At present, medical gloves are in great demand, but going forward, there will be more industries that will use gloves, which will in turn, provide another leg of growth for the glove industry, ” an analyst said.

PETALING JAYA: The demand supply imbalances of the glove industry is expected to normalise after 2022, as average selling prices (ASPs) decline.

These expectations have been factored into the earnings forecast of local glove makers, which show a dip in earnings for 2022, after a run-up in 2020 and 2021.

An analyst said the decline in earnings forecast for financial year 2022 (FY22) does not come as a surprise and is widely expected.

“However, glove demand is inelastic. At present, medical gloves are in great demand, but going forward, there will be more industries that will use gloves, which will in turn, provide another leg of growth for the glove industry, ” he said.

Kenanga Investment Bank Research concurred, highlighting that glove makers are receiving orders from new groups of users, which include airlines, restaurants, retail apparel chains and hotel operators.

According to CLSA, base ASPs are expected to remain at current elevated levels, as long as spot orders are sustained.

“We believe spot demand will only start contracting when demand supply imbalances normalise.

“Even then, the industry would have gone through a significant drawdown in inventory, which necessitates end users and distributors to rebuild buffer inventories for another year.

“We expect this coupled with significantly higher cost of operations in the new norm to sustain an estimated 20% higher run-rate ASPs vis-à-vis pre-Covid-19 levels, ” said CLSA in a sector report.

The research house noted that the blended ASPs will remain relatively defensive, as spot ASPs remain a small proportion of sales volume for Top Glove Corp Bhd, Hartalega Holdings Bhd and Kossan Rubber Industries Bhd.

CLSA has forecast Top Glove’s net profit to grow at 396% in FY20 and 188% in FY21, followed by a decline of 70% in FY22.

On the other hand, Hartalega’s net profit is expected to grow at 230% in FY21 and 22% in FY22, with a 29% dip in FY23, while Kossan’s net profit growth is forecast at 185% for FY20 and 37% in FY21, after which, will likely decline by 24%.

Despite China’s nitrile glove capacity expansion, which will see major players Blue Sail and Intco Medical add some 74 billion pieces per annum by 2022, CLSA opined that the years of destocking in prior years will require the industry to restock through 2022.

This restock will provide strong support for glove demand then.

Apart from that, the new supply from Chinese players could be absorbed domestically, as gloves consumption per capita in China is expected to surge sharply following the Covid-19 experience.

According to Kenanga Research’s assumptions, a population of 1.4 billion and a conservative 30 gloves per capita implies a massive 42 billion pieces of rubber gloves consumption in China annually, as compared to the current 2.8 billion pieces.

Global glove shortage is projected at 30 billion pieces in 2020,34 billion pieces in 2021 and 13 billion pieces in 2022.

As for global demand growth forecast, CLSA assumes 25% growth for 2020, which translates to an additional 66 billion pieces, in line with industry forecasts of 20% to 30%.

Meanwhile, global demand for gloves is expected to grow at 15% in 2021 and 10% for 2022.

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