Glove makers poised for improved margins in 2024

RHB Research analyst Oong said that a “meaningful” recovery for glove exports may only happen by the second half of 2024.

PETALING JAYA: The glove sector lacks excitement amid declining export sales, but with just three more months heading into 2024, a research firm says that an improvement in demand could be forthcoming next year.

RHB Research analyst Oong Chun Sung, however, cautioned that “meaningful” recovery for glove exports may only happen by the second half of 2024 (2H24), as the inventory destocking pace comes in slower than expected.

Coupled with a favourable cost outlook and a rationalisation of glove inventory by 2H24, Oong expects glove makers to see improved margins in 2024.

“We think the consistency of order replenishments and gradual improvements in industry utilisation rates will be key rerating catalysts in the near term,” he said in a note.

Nevertheless, RHB Research has maintained its “neutral” view on the rubber products sector.

“Our sector weighting is justified based on the expectation of a normalised cost outlook by 2H23 (lower gas tariffs) and better operating efficiencies post-capacity rationing exercises.

“However, we choose to remain conservative, as we have yet to see demand clarity in 2023,” he added.

The research house has Hartalega Holdings Bhd and Kossan Rubber Industries Bhd as its top picks.

Oong noted that the recovery trend remains to be seen for the glove makers following July’s weaker export numbers.

“This could potentially mean demand is still failing to catch up with industry expectations, as inventory is supposed to normalise to pre-pandemic levels.

“Nonetheless, the gradual market dynamic improvements should offer respite for the local glove manufacturers,” he said.

Malaysia’s glove export volume contracted 1% month-on-month (m-o-m) in July, following a 7% m-o-m decline in June.

This was 2023’s first two consecutive months of declines in glove exports, noted Oong.

Meanwhile, in the second quarter of 2023 (2Q23), the country’s glove exports tumbled by 17% quarter-on-quarter (q-o-q) as compared to 1Q23’s 0.3% q-o-q growth.

Oong has trimmed his forecast for global glove demand in 2023, and currently expects the demand to fall by 7% year-on-year (y-o-y) instead of 5% earlier.

The global demand for gloves is expected to be 371 billion pieces in 2023.

“This should be followed by a 4% growth in 2024, in our view,” he said.

As for the industry’s glove supply this year, Oong said it could contract by 50.7 billion pieces y-o-y, in view of cuts of 40 billion pieces by Top Glove Corp Bhd, 13 billion pieces by Hartalega, three billion pieces by Kossan and five billion pieces by Supermax Corp Bhd.

“Our 2023 industry annual supply assumption is now 372 billion pieces.

“We expect the capacity rationing exercises, given domestic plants’ low utilisation rate of 30% to 40% could lead to better operating efficiencies, given that the obsolete local plants are less energy and manpower efficient,” he said.

Commenting on glove prices, Oong highlighted that the industry’s blended average selling prices (ASPs) stabilised at US$20 to US$21 per 1,000 pieces, largely unchanged from 1Q23’s numbers.

Attempts to raise prices were hamstrung with obstacles, according to him, given the easing of raw material prices.

“According to our channel checks, Chinese glove makers’ ASPs were unchanged from 1Q23 levels at US$15 to US$17 per 1,000 pieces.

“Nevertheless, we think the stabilised ASP trend should bode well for glove makers in the near term, as an aggressive price hike could compromise volumes sold, given that customers remain price-sensitive,” said Oong.

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