Thursday, January 21

Global demand to continue driving earnings for rubber products

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KUCHING: The resilience of global demand is expected to continue driving earnings for the rubber glove sector as it continues to be plagued with higher natural rubber prices.

While current raw material prices like natural rubber is expected to continue trading at higher levels for the remainder of 2018, analyst MIDF Amanah Investment Bank Bhd (MIDF Research) believes that the sector’s earnings will continued to be driven by resilient global demands for rubber gloves in 2H18.

According to the research arm, the Malaysian Rubber Glove Manufacturers Association (MARGMA) has project that the export for rubber gloves will increase by +10 per cent to RM18 billion from RM16.2 billion in 2017, which is in line with the estimate increase in global demand of 8 to 10 per cent per annum.

“In terms of number of pieces, MARGMA projected Malaysia will export 232 billion pieces in 2018 versus 228 billion pieces in 2017, and 287b pieces per annum by 2020,” said the research arm.

The earnings form the increased exports will also be supported by forecasts of a stable US dollar (US dollar) as the exports are USD-denominated.

However, MIDF Research guides that the current stable US dollar is more beneficial in the longer term than near term as it provides better visibility in terms of revenue and costs while also assisting in currency hedging for manufacturers and reduce potential foreign exchange losses.

And softening the effects of higher raw material prices further is the potential increase in average selling prices (ASPs).

Based on analysis by MIDF Research, it was suggested that the blended average selling prices (ASPs) for gloves have increased less than 23 per cent, meaning that there could potentially be further price increase in 2Q18.

“Therefore, we believe that the gloves producers could potentially record better earnings in the quarters to come due to adjustments in pricing and new capacity expected to come on board in 2H18,” said the research arm.

The raw material prices are expected to continue trading high between the ranges of RM4.50 to RM5 per kg for the remainder of 2018 due to the Tripartite Agreement between Malaysia, Thailand and Indonesia, which aims to ensure the price of natural rubber does not fall below RM4 per kg.

Besides that, the high price of natural rubber will also be supported to remain at current levels due slower growth in China’s automotive industry arising from its recent move to restore its passenger car purchase tax to 10 per cent from 7.5 per cent in 2017 and 5 per cent in 2016.

“That said, we also understand that despite ending the tax incentive policy for compact cars with an engine displacement of 1.6litres and below, starting in January 2018 the government of China has introduced purchase tax exemption for New Energy Vehicles (NEV) for the period of three years which could gradually alleviate the price of natural rubber from 2019 onwards,” added the research arm.

As for nitrile butadiene (NBR) price, the research arm opines that the price would be trending upwards as the demand for nitrile gloves increases worldwide.

Due to this, they estimate that the price of NBR could increase by a further 5 to 10 per cent from its current price to an average of USD1,000 to 1,100 per tonne for the rest of the year.

For 1QFY18, most rubber glove manufacturers found themselves within expectations but with subdued earnings due to a +23 per cent hike in natural gas tariff in January.

Looking forward, the sector will be facing some uncertainty in terms of labour as the new government’s election manifesto has highlighted their intent to increase minimum wages to RM1,500 while reducing foreign labour force by two million in stages.

According to the research arm’s estimates, a RM500 increase in minimum wages will reduce earnings of glove producers by RM1.5 to RM3 million, however this is expected to be passed off to their customers and will be reduced as companies start investing more on automation going forward to reduce their dependency on labour.

Currently, labour costs make up about 12 to 14 per cent of total gloves production costs and 70 to 80 per cent of the sector’s total workforce are foreign labourers.

Moreover, the sector’s near-term prospects are also expected to remain subdued as some rubber glove producers have constraints in terms of capacity from the delay in their capacity expansion from incomplete parts of their production lines.