Glove oversupply to persist throughout second half of 2022
Rubber glove oversupply is expected to persist throughout the second half of 2022 (2H22) as it will take some time for the demand-supply imbalance to normalise, Hong Leong Investment Bank Bhd (HLIB) said.
KUALA LUMPUR: Rubber glove oversupply is expected to persist throughout the second half of 2022 (2H22) as it will take some time for the demand-supply imbalance to normalise, Hong Leong Investment Bank Bhd (HLIB) said.
HLIB said post mass rollout of vaccination globally, the demand for gloves had greatly softened and remained subdued thus far.
This was further exacerbated by the aggressive capacity expansion by both incumbents and new entrants, tipping the sector into an oversupply state.
"We believe the oversupply situation is likely to persist throughout 2H22, as buyers are still unwilling to commit to huge orders," it said.
HLIB noted that some of the new entrants were looking to exit the industry completely, given the challenging operating environment currently.
While that should help remove some supplies off the market, the firm said collective effort from all industry players was still the key to curtail excess supply.
"From what we gather, most of the glove makers are keeping their expansion plans on hold for now.
"The imbalance demand-supply dynamics should also continue to keep average selling price (ASPs) depressed in 2H22.
"We reckon that any possible upward adjustment in glove pricing would be marginal, mainly to accommodate the increase in operating costs," it said.
HLIB said glove players were not spared from the high inflationary environment and had been facing increasing cost pressures arising from higher raw material, wages and natural gas costs.
That said, the firm does expect raw material prices to ease as we move into 2H22, as latex production climbs post wintering season, as well as lower demand for nitrile butadiene rubber (owing to smaller glove players exiting the business and subdued glove demand).
"Our house view of a ringgit appreciation in 2H22, coupled with the relatively lower run rate would also be detrimental to the glove makers.
"Owing to the soft demand and intense competition, glove makers now have lesser pricing power and have yet to return to the cost-plus basis model.
"Margin erosions are likely to continue in 2H22 in our view, as the cost hikes were unable to be fully passed on," it said.
HLIB downgraded its rating on Hartalega Holdings Bhd to "Sell" on higher risk to be booted out of the FBM KLCI in the upcoming review, while maintaining its "Sell" call on Top Glove Corp Bhd.
Despite facing the same set of challenges, the firm is keeping its "Hold" recommendation on Kossan Rubber Industries Bhd.
"We believe Kossan's relatively smaller capacity is a redeeming feature and any potential increase in orders are more likely to fill up its capacity sooner.
"All in, we maintain Underweight on the glove sector," it added.
https://www.nst.com.my/business/2022/07/811752/glove-oversupply-persist-throughout-second-half-2022
