Short Position - Platform for Rubber Glove Futures?

  • Corporate News
  • Saturday, 15 Aug 2020

Some reports indicate that spot prices of gloves have skyrocketed by as much as 400% in the past few months as panic buying of gloves ensues. In essence, this means, there is now a futures market for these gloves.Perhaps it is a good time for someone to create a credible platform for glove futures.

Rubber glove profiteering

AS local glove makers strive to fulfil orders, a flurry of middlemen have emerged.

Try placing a large order today with any of the top glove makers, and you will be put on a long waiting list.

But there are brokers who can help fulfil your orders. One modus operandi of the brokers is to buy up orders from parties who no longer need the gloves

Assuming you ran a business that typically required the usage of a large quantity of rubber gloves.

A good example is a chain of aesthetic clinics.

Pre-Covid-19, it was business as usual, and hence your orders had been placed at prevailing prices then. But with the onset of the pandemic, your business operations have been scaled down extensively but you still have those glove orders placed and rightfully to be delivered to you.

So in such situations, a middle person with this information, may now approach you to “buy” your order off you, at a higher price than what you paid for. That broker in turn, will be able to flog off that order to a desperate buyer at a more lucrative price.

Some reports indicate that spot prices of gloves have skyrocketed by as much as 400% in the past few months as panic buying of gloves ensues.

In essence, this means, there is now a futures market for these gloves.

Perhaps it is a good time for someone to create a credible platform for glove futures as that would help establish a better price discovery process for the products and likely weed out the unscrupulous profiteers monopolising the wheeling and dealing now.

Signals from ELK

MOST people are bracing for tough times in the months to come. The moratorium on loan repayments will end next month and the moment of truth will set in for the ordinary households.

Those who are unable to pay up have the benefit of negotiating a new repayment schedule with the banks. However, they also have to prove that their income has been adversely impacted by the Covid-19 pandemic.

Nobody really knows how long it will take before the economy comes back to normal. It is because the crisis this time around affects the man on the street most as most small businesses are seeing lower turnover.

One indication of how long the troubled times can last is by looking at loans growth of firms for second hand cars.

When the economy improves, the transactions in the used car markets picks up.

Towards this end, ELK Desa Resources Bhd, which is probably the biggest financier of used cars, expects the dire situation to continue another year. In its latest results, ELK-Desa, which used to be better known among second-hand dealers as Eng Lian Credit, does not expect its hire-purchase portfolio to grow for the next one year.

It expects unemployment to increase significantly in the second half and business sentiment to worsen. It says that investments by the private sector are subdued and this would translate into lower spending by consumers.

The business model of ELK-Desa puts it in touch with the situation on the ground. It is a non-bank lender and its hire-purchase segment specialises for low-value used cars.

It is an area where the traditional financial institutions do not serve.

ELK Desa is also into the business of providing financing for furniture companies. This area is another segment that is largely useful for the poor but not served by the traditional banks.

It stated that it was cautious in lending to the furniture segment and would only work with those who are credible.

Risk management in stock brokers

THE overheating market took a breather yesterday but that also means that a number of investors must be sitting on losses.

The market fell by 11.83 points to 1,564.59 led by declining prices of major rubber glove stocks.

Another interesting development, which may have contributed to Friday’s sell-down is that one stockbroking company, decided to suspend contra trades for healthcare-related stocks, which include the rubber glove companies.

So far, there is no indication that other brokerages are making any similar moves.

The brokerage’s move must have been premised on ensuring that the brokerage is not exposed to risks if any steep sell-down of the market takes place.

But it raises some questions. What is the current state of risk management that brokerages have?

Other than healthcare-related stocks, many penny stocks have also attracted speculative interest and seen a sharp rise and fall on Bursa Malaysia recently.

After many market collapses in the past, Malaysian brokerages should have sharpened their risk management rules and be able to function without having to suddenly change their rules.

Recall that the 1997/98 Asian financial crisis had led to a collapse of the stock market, massive corporate defaults and non- performing loans, resulting in a banking crisis.

Between July 1997 and mid-January 1998, abut US$225bil of shares were wiped out of the local stock market – impacting brokerages, some of which were bank-backed.

One response to that crisis was to restructure corporate debt and recapitalise the banking sector.

The approach adopted in implementing the reforms in the financial sector has served to transform Malaysia’s financial sector into what it is today – resilient and diversified.

That said, we should continue to remain attentive to new challenges and emerging areas of risk considering a more sophisticated financial sector with new instruments and financial innovations.

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