Glove sector likely to be affected if natural gas prices go up

PETALING JAYA: A hike in natural gas prices this quarter will likely have a significant impact on glove makers unless the companies can pass on the impact through higher average selling prices (ASPs), according to UOB Kay Hian (UOBKH) Research.

The research house stated a potential steep hike in natural gas tariff of up to 25% by Gas Malaysia Bhd in the quarter will be bad news for the glove sector, which accounts for 33% of Gas Malaysia’s industrial volume.

Natural gas accounts for about 10% to 15% of the cost of goods sold of glove producers such as Hartalega Holdings Bhd, Kossan Rubber Industries Bhd, Supermax Corp Bhd and Top Glove Corp Bhd.

“While these producers would successfully insulate earnings through a cost-savings mechanism in the past, the effectiveness of the mechanism is less clear cut under existing unfavourable demand supply dynamics,” UOBKH Research said.

According to its assessment, every 10% hike in natural gas prices would effectively translates to a 10% decline to glove producers’ earnings.

“Based on our estimates, a full cost-pass-through of a 10% tariff hike requires a 1% hike in ASP of gloves,” it added.

Other sectors such as technology, auto, building materials as well as food and beverages are expected to have a minimal impact from a potential tariff hike, owing to their low exposure to natural gas as an input cost.

Gas Malaysia, meanwhile, could be a key beneficiary of the tariff hike as its fixed margins translate into higher absolute earnings.

“Therefore, the higher the gas cost, the higher the absolute profits. However, this is partially offset by lower volume demand from energy intensive industries such as the glove industry, which accounts for at least 30% of Gas Malaysia’s industrial volume,” UOBKH Research said.

The research outfit expects Gas Malaysia’s earnings to be lifted by 7%, for every 10% hike in natural gas prices.

The uplift in natural gas prices are expected following a 33% quarter-on-quarter increment in the second quarter of this year (2Q22) to an estimated RM40 per gigaJoule (GJ).

UOBKH Research expects natural gas price for the second half of this year (2H22) to reach RM50 per GJ, representing an additional 20% to 25% increase.

It forecast 3Q22 and 4Q22 natural gas price at RM40 per GJ and above RM50 per GJ, respectively.

“Beyond 2022, we have pencilled in a gradual decline in natural s prices for 2023 and 2024. While the elevated tariffs could be short lived, the impact is significant,” it added.

UOBKH Research noted Gas Malaysia’s earnings are expected to peak in tandem with natural gas tariff rates but similarly moderate after 2022. It said Gas Malaysia offers a sustainable dividend yield of at least 6%.