Oversupply could impact prospects of new players
PETALING JAYA: The gradual decline in glove prices and oversupply is already impacting the near-term average selling price (ASP) for the sector and the prospects of new entrants into the sector.
A check with e-commerce sites revealed that the ASP of a box containing 100 pieces of nitrile gloves are selling at steep discounts from before.
Meanwhile, an analyst said the declining ASP for gloves would have a greater impact on smaller players that want to capitalise on the surge in demand for sanitising products in Malaysia amid the Covid-19 outbreak.
“The decline in prices and oversupply in production would have a minimal impact on the big players, as they have the economies of scale,” he said.
Earlier this month, little-known AT SYSTEMATIZATION BHD (ATS), which specialises in industrial automation systems, made headlines when it announced that it is acquiring Pearl Glove (Malaysia) Sdn Bhd for RM22mil.
In a filing with Bursa Malaysia, ATS said it intends to install and commission up to 20 new productions lines within 36 months to manufacture medical-grade nitrile examination gloves, which is expected to yield a production capacity of up to three billion pieces of gloves per annum.
Over the past few weeks, names of several companies have cropped up in the news, linking them with the glove sector.
Last week, MQ Technology Bhd, a company that manufactures various mechanical parts such as coils, precision plates, jigs and fixtures clarified a news report that it was keen on negotiating with the shareholders of Latexx Partners.
Latexx Partners is a major glove manufacturer that was privatised in May 2013 at a cost of RM580mil by Semperit Group.
A few weeks back, ACOUSTECH BHD, a company that is in the business of manufacturing multimedia speaker systems, speaker units and specialised chemical paints, was speculated to be the backdoor vehicle of unlisted glove manufacturer WRP Asia Sdn Bhd.
An analyst said the entrance of new players would likely create pressure on the sector. “Should the Covid-19 crisis start easing as a result of better control processes, or if a vaccine is found, Malaysian rubber glove manufacturers’ ASP and operating profit margins will come under pressure due to oversupply.”
Meanwhile, Maybank Investment Bank Research (Maybank IB) in a recent report said oversupply of gloves may jeopardise the near-term ASP hikes for the sector.
“Capacity growth may exceed our expectation in the event that glove producers in other countries (like China) commission the new capacities earlier than our expectation; and successful development of many vaccines in early next year may dampen the sentiment on the glove stocks and potentially result in softer demand in 2021.”
The research house said glove players are, however, of the view that the demand growth in 2021 is underpinned by the organic growth, as well as stock replenishment requirement.
“Presently, many countries are holding either zero or close to zero glove inventories.”
Coupled with its estimated supply growth of 16%, 19% and 12% from 2020 to 2022 respectively for Malaysia’s top-five glove makers, Maybank IB said supply could catch up with demand by the second-half of 2021.
“However, before a balanced market is reached, we think the ASPs may gradually ease from the second quarter of 2021 (after the usual flu season during winter).
“In our earnings forecasts, we have already imputed for lower ASPs from the first quarter of 2021 and we have also assumed for the 2022 ASPs to revert to the pre-Covid-19 level.”
In terms of an increase in global production, CGSCIMB in a recent report noted that China glove makers had announced aggressive expansion plans.
“Recent media reports indicate that two China glove makers, Blue Sail Medical and Intco Medical, have ambitious plans to ramp up their nitrile glove production capacity. We gather that Blue Sail aims to raise its nitrile glove production capacity to 36.1 billion by end-2023 from 4.3 billion at end-2019.
“Intco plans to expand its nitrile glove capacity to 59.2 billion per annum by end-2023 from five billion at end-2019.”
The research house however said that there was “no reason to be overly concerned at this juncture”. “Out of the total incoming China nitrile glove capacity of 86 billion pieces per annum, only 7.7 billion are slated to be ready by the fourth quarter of 2020, assuming no delays. As for the remainder new capacity, we gather that certain factory sites have not been identified.
“In addition, we expect the commissioning of new production lines in the new factories to be delayed, resulting in the new capacity coming on stream on a staggered basis. This will allow the new capacity to be well-absorbed by the inelastic global glove demand.”
CGSCIMB said Malaysian glove makers had cost and quality advantage. “Besides higher labour costs, natural gas prices are higher in China compared with Malaysia. In addition, the consumption of natural gas to manufacture gloves (10% of total cost) in China is higher due to weather conditions (four seasons).
“Also, China had in the past issues with a natural gas shortage, which may lead to quality issues and production disruption.”
The research house added that China’s new capacity would be absorbed by increased domestic usage.
“We believe Blue Sail and Intco’s new capacity would mainly cater to the rise in domestic demand.
“Also, we believe recurring large-scale glove buyers are unlikely to source sizeable glove quantities from China due to concentration risk, given that China is already the largest supplier of personal protective equipment products globally, according to Asian Development Bank’s research.”