The Rubber Glove Industry

again from Mr Kok, thanks, I am not buying CPO, Rubber Glove,but concentrating on some small property laggards(a meaningful and yet useless term,as expert used to say leader will always be leader and laggards will forever be laggards, is that so, I dont know ....what I want is my 20%(or ~15%if situation change)profit and looking at these rather small counters with minimal downside risk(I said so)I can have peace of mind.

The Rubber Glove Industry
The Pessimistic Outlook … dated Oct 2010

The Malaysian Rubber Glove Manufacturers’ Association’s (Margma) move to urge its members to increase selling prices, which are denominated in US dollars, seems like rain in the dry spell for the glovemakers.

Margma’s statement is an influential one considering that its 45 members collectively supply 60% of the world’s rubber glove demand. According to Margma president KM Lee, the price increment is about 10% to mitigate the effects of costlier raw materials and a weakening US dollar.

In fact, the majority of glove producers, especially the bigger players, have raised prices of their products. The early birds had done so as early as the beginning of 2010, while some initiated price hikes in Sept – Oct 2010.

The 10% increase took into account that latex constituted some 60% of production cost and the 19% rise in natural rubber or latex prices since early 2010.

In reality only 80% of the price increment will be borne by the customers, and the glovemakers will still have to absorb the remaining 20% of price adjustment. This is the common practice in the industry.

So is the 10% price increase enough to cover the rise in costs and to offset the foreign exchange effect caused by the stronger ringgit?

The price of latex rose by 19% from an average of RM6.57 per kg in January 2010 to a high of RM7.79 per kg in late Oct 2010.

Demand for natural rubber is outstripping supply, due to growing consumption of the commodity for tyre production in growing economies, such as China and India’s automotive industries. Also, the pace of natural rubber production is not keeping up with demand. Apart from weather problems, planters are also reluctant to start replanting activities, causing a fall in production yield.

Meanwhile, the ringgit has strengthened 9% to RM3.12 against the US dollar so far till Oct 2010, helped by the inflow of foreign funds.

Industry players said the issues of costlier natural rubber and stronger ringgit were not new to glove manufacturers. However, the real issue is overcapacity due to consistent capacity expansion in anticipation of constant demand growth due to the outbreak of diseases in the past.

Apart from the capacity expansion among the Malaysian players, there are also new glove manufacturers sprouting up in South America.

It remained to be seen if the 10% hike in glove prices was sufficient to cover the higher costs. This takes into consideration that latex rates are still high, and the overcapacity environment within the glove manufacturing fraternity will also reduce plant efficiency.

Players are also undercutting each other.

4Q2010 & 1Q2011 to be tough for the industry in anticipation of weaker quarterly growth.

In view of the overcapacity landscape, it is likely that players will have less bargaining power to pass down the higher cost to buyers.

The Optimistic Outlook … dated Oct 2010

Nonetheless, some industry observers view that concerns about overcapacity, margin and earnings pressure from the normalising of glove demand, high latex prices and weakening US dollar have all gone overboard.

It concurs that the slowdown in demand, coupled with slower-than-expected cost pass-through due to high latex prices and the weak US dollar, could lead to a continuation of the weak earnings trend for the glove makers. But this is a temporary situation as growing hygiene awareness and increase in healthcare spending should give glove demand a big helping hand.

The glove demand growth is still deemed healthy and glovemakers’ pricing power would still allow them to pass on the additional costs to customers, albeit, with a time lag of one to two months.

Higher latex prices had prompted anticipation of lower demand for natural rubber gloves, and vice-versa should latex prices decline.

Going forward, dynamics in the glove manufacturing industry will be closely watched given the current challenging operating landscape. It will be interesting to see how the players execute their revenue-growth and cost-cutting strategies as they contend with the headwinds.