RHB Research said the glove sector remains in a tough fight against persistent oversupply and stubborn pricing pressure, even as global demand for gloves rises this year. — Bloomberg
PETALING JAYA: Malaysian glovemakers appear to be retreating from non-US markets as China keeps dumping its excess glove capacity at razor-thin margins, analysts say.
RHB Research called this a “deliberate strategic retreat”, pointing out that Malaysian producers are instead increasing their market share in the United States, which is widely regarded as the largest single-country consumer market for disposable and medical gloves in the world.
Using Statistics Department data for last January to October, RHB Research estimated that about 56% of Malaysian-made gloves were shipped to the United States.
Conversely, the non-US segment shrank to 44% of total exports and declined on an absolute basis.
“In our view, Malaysian manufacturers are actively curtailing exposure to non-US markets, where China producers displaced from the United States are aggressively dumping excess capacity at razor-thin margins.
“This has resulted in a two-speed market, where the United States acts as a relative ‘sanctuary’ market, while non-US regions see accelerated exits and volume rationalisation,” the research house said in a note to clients.
Malaysia’s rising US market share is being driven by the forced migration of US buyers away from China suppliers following unfavourable tariffs that have rendered China-origin gloves uncompetitive in terms of price.
Thailand and Vietnam have also benefitted from this displacement effect, albeit to a lesser extent.
Meanwhile, RHB Research said the glove sector remains in a tough fight against persistent oversupply and stubborn pricing pressure, even as global demand for gloves rises this year.
RHB Research said incremental supply from Chinese glove producers’ offshore facilities may exacerbate the pressure on average selling prices going into this year.
One such facilities is Intco Medical’s plant in Indonesia, which is designed with a long-term capacity of up to 40 billion pieces yearly and largely targeted at US demand under a more favourable tariff regime.
“Compounding this pressure is the rise in raw-material costs.
“While a weakening US dollar provides some relief on ringgit-denominated input costs, it simultaneously erodes manufacturers’ pricing power.
“In a price-taker environment, buyers are likely to leverage the stronger ringgit to resist price pass throughs, thereby increasing margin compression risks,” RHB Research said.
A fund manager who spoke to StarBiz said the glove sector may see better sales this year, but this may not necessarily translate into stronger margins for the manufacturers.
“The valuations of glove stocks may seem undemanding now, but the outlook is not promising,” it added.
RHB Research expects the demand for gloves to grow by 8% this year to about 400 billion pieces, from the estimated 370 billion pieces last year.
This should be followed by more moderate 6% growth next year to about 424 billion pieces, driven by structural improvements in global hygiene awareness and occupational safety standards.
“Under these assumptions, a more balanced demand-supply dynamic could emerge by next year.”
For this year, the research house said it believes the glove sector’s earnings growth is unlikely to be driven by price expansion.
It would, however, depend on operating leverage through higher utilisation and tighter cost discipline.
“That said, the dual risks of a weaker US dollar and rising raw-material prices could compress margins should cost pass through opportunities remain limited,” it said.
The research house kept its “underweight” call on the sector unchanged.
Based on its aggregate estimates, RHB Research said Malaysian glove producers would account for approximately 40% of global capacity this year.
“We caution that this figure may overstate effective supply, as it includes idle lines and capacity located outside Malaysia. Nonetheless, excess supply remains the key overhang to any meaningful price recovery,” it said.
