Glove makers unlikely to be severely impacted by softening prices
THE recent double-digit dip in glove ASPs (average selling prices) for Top Glove Corp Bhd is not likely to be mirrored by other glove makers, due to certain factors that are unique to the world’s largest glovemaker, say research analysts.
An industry observer told StarBizWeek that other glove makers may not see a similar dip in ASPs quarter-on-quarter, as their ASPs previously had lagged that of Top Glove.
“Part of the reason Top Glove’s ASPs fell was because of the United States Customs and Border Protection’s (US CBP) withhold release order (WRO) resulting in a fall in sales to the United States. Note that selling prices to the United States are higher than the global average. So, the group had to divert orders away from the United States (to other regions with lower ASPs), ” explained the industry observer.
“So, the fall in ASPs from Top Glove is a natural convergence in pricing. However, we do expect glove ASPs (globally) to fall in the third quarter of 2021, ” he said.
The WRO had led to Top Glove diverting orders away from the United States (North America sales volume lower by 68% quarter-on-quarter) to other territories (Latin America, Asia ex-Japan and Eastern Europe sales volumes grew 66%, 19% and 17% respectively).
A bank-backed research analyst concurred, and said other glove makers are not likely to report a decline in ASPs as experienced by Top Glove in its third quarter ended May 31, 2021 (Q3FY21).
“From what we understand, Top Glove is no longer doing spot price sales which fetch very high prices, so that customers can get the orders immediately. Also, another factor to consider is that previously Top Glove had adjusted their pricing more aggressively compared to the other players. So, the WRO really caused this distortion in ASPs for Top Glove. If other players continue to maintain their sales volume, even if there’s a softening in ASPs, it won’t be as drastic as that recorded by Top Glove, ” said the research analyst.
For its Q3FY21, on a quarter-on-quarter comparison, Top Glove saw its net profit and revenue drop 29% and 22% respectively, which the group said was due to lower glove average selling prices (ASPs) which peaked in February 2021.
Top Glove executive director Lim Cheong Guan noted that on a quarter-on-quarter basis, average selling prices (ASPs) for gloves had declined by 16% in line with market pricing trends, and the group also saw reduced sales to the United States, following a temporary halt in shipments from Malaysia in compliance with requirements of the WRO on its products amid forced labour allegations.
Top Glove’s sales volume also eased 4% quarter-on-quarter mainly due to lower sales to the United States.
AmInvestment Bank Research pointed out that Top Glove’s Q3FY21 lower sales was exacerbated by two other factors - higher number of order cancellations and buyers adopting a wait-and-see approach, problems which its peers are also facing.
“Potential buyers adopt a wait-and-see approach for glove prices to drop, while stronger order cancellations signify stronger bargaining power from the customers. In the coming quarters, we doubt that any resultant potential surge in sales from this approach would be able to offset the continual declines in ASPs, ” said the research unit.
It noted that Top Glove had recorded a fall of 21% quarter-on-quarter in blended ASPs to US$65 (RM266) per 1, 000 pieces in Q3FY21.
“We predict a drop of US$5 (RM21) in each month for the next quarter, in line with market prices. In contrast, Top Glove’s peers that are still operational in the United States are expected to have their earnings peak in the coming quarter, alongside reporting their best ever glove ASPs, ” said the research unit.
AmInvestment Bank Research also opined that Top Glove would see another earnings decline in Q4FY21 due to the movement control order (MCO 3.0)-imposed 60% workforce limitations disrupting production (although this will be somewhat offset by Top Glove’s sizeable inventory) and sharper declines in ASPs as non-United States markets are heavily competitive.
It also said as a result of Covid-19 vaccination efforts, there is lower overall demand from Western countries.
“As an indicator, glove lead times, formerly six months long in the past quarter, have since subsided to 30 to 50 days. Top Glove no longer provides spot orders.”
“While the eventual lifting of United States sanction will likely cause a notable sentiment-driven upswing, we believe that it too will peter in the face of waning average selling prices (ASP) and general glove demand, ” said AmInvestment Bank Research.
Meanwhile, a UOB Kay Hian Research report on Top Glove pointed out that heading into the group’s Q4FY21, a successful lifting of the WRO could uplift volume sales by 10% to 20% on a quarter-on-quarter basis.
The research unit expects Top Glove to see volume growth ahead but at an expense of its ASPs, given that key geographic regions that typically command premium ASPs are curtailing demand.UOB Kay Hian Research said heading into Q4FY21, Top Glove’s nitrile glove ASPs could be lower by 20% to 30% quarter-on-quarter or 5% to 10% lower on a month-on-month basis.
“We gather that nitrile glove ASPs are currently trending between US$75 (RM307) to US$70 (RM287) per 1, 000 pieces for June and July 2021. This is slightly ahead of our earlier expectations of ASPs normalising by 3% to 5% month-on-month.”
The research unit attributed this to the WRO which accelerated the deterioration in Top Glove’s ASPs, and the successful Covid-19 vaccination rollout in developed markets.
Top Glove’s Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin in 3QFY21 also softened to 63.8% against lower ASPs and increased raw material cost, with higher latex and nitrile costs which grew at 8% and 0.4% quarter-on-quarter respectively.
Going forward, raw material cost is expected to trend downwards as nitrile cost is being eased by incoming supply while the wintering period is over, marking an increase in latex supply.
However, UOB Kay Hian Research also noted the decline in Top Glove’s ASPs is expected to outpace the drop in raw material cost, which should gradually normalise margins in the quarters ahead.
Challenges for new glove players
As for new entrants into the glove-making space, an industry observer opined that they should be concerned about softening glove ASPs in the coming quarters as they have a higher cost structure than the incumbent glove players.
Another research analyst also opined that the existing top glove makers have the advantage in terms of production volume and efficiencies, controlling labour costs and meeting environmental, social, and governance (ESG) standards as well as proven market experience.
The research analyst observed that based on news reports, one of the smaller glove players seem to have raw material costs that is 20% to 30% higher than the big players.
“The big boys have the quantity advantage, so I don’t know if the new players can bargain for the same level of raw material prices, ” he said.
He also noted that while the new players are touting modern and more efficient machines, the existing big players also have access to such manufacturing technologies as they ramped up their production capacities in the coming quarters.
“The big players have also built long-term relationships with their customers over the years. Also, new players may find it tough to deal with increasing labour costs and comply with ESG standards, ” said the research analyst.
On Wednesday, Top Glove executive chairman Tan Sri Lim Wee Chai had cautioned that new nitrile glove players may find it difficult going in the coming one to two years as the demand-supply situation gradually normalises and ASPs decline.
“The glove business is international and very competitive. In the past 20 or 30 years, 250 glove factories were set up and 80% of them have closed down. The risk is high. It is very difficult to compete with the existing players unless you are extremely good, ” said Wee Chai.
The new entrants which have started new operations, acquired stakes in existing glove manufacturers or are planning to set up glove factories include Mah Sing Group Bhd, Hong Seng Consolidated Bhd, Kuala Lumpur Kepong Bhd, a tie-up between Singapore-listed property company Aspen (Group) Holdings Ltd and CMY Capital Sdn Bhd, Salcon Bhd, Vizione Holdings Bhd, AT Systematization Bhd as well as a venture between Johan Holdings Bhd and George Kent (Malaysia) Bhd.