Rubber glove industry faces demand shift

Apr 23, 2011   //   News

Rubber glove industry faces demand shiftKUCHING: The aggressive expansion plans of the rubber gloves’ nitrile segment could lead to average selling price weakness in the short term before demand from emerging markets catches up.

In a desperate move to retain its customer base, latex-focused original equipment manufacturers (OEMs) were frantically expanding their nitrile production, said Maybank Investment Bank Bhd analyst Lee Yen Ling in a research note yesterday.

At the Invest Malaysia 2011 Conference last week, Top Glove Corporation Bhd concurred with the analyst’s view that pricing was still the key determinant of glove sales. It also indicated its plan to have 50 per cent nitrile in its product mix, within a four to five years time frame.

In 2011, the top seven, namely Top Glove, Supermax Corporation Bhd, Kossan Rubber Industries Bhd, Hartalega Holdings Bhd, Latexx Partners Bhd, Adventa Bhd and YTY Industry Sdn Bhd, which control around 55 per cent of the world examination gloves market, were scheduled to lift their new capacity by an estimated 17 billion pieces and almost all were earmarked for nitrile production.

This represented a supply surplus of six billion pieces of gloves in 2011, on the assumption that global demand grows by eight per cent year-on-year (y-o-y) this year, said the analyst. “Nevertheless, we believe the overall supply overhang is in the latex glove segment rather than nitrile, given the robust growth of nitrile glove demand.”

While global glove demand was growing at a moderate rate of eight per cent to 10 per cent per annum, it was believed that nitrile glove demand would grow at a robust rate, taking market share away from latex gloves.

“In fact, Hartalega expects nitrile glove demand to grow strongly at 30 per cent per annum, given the pricing disparity and the switch to nitrile gloves is aggressive in the developed markets such as the US and Europe,” Lee pointed out. “Demand from emerging markets could rise exponentially when nitrile OEMs start creating awareness of nitrile gloves and penetrate the market this year.”

On the financial front, after the V-shaped recovery in March 2011, natural rubber latex (NR) price had remained at high levels. However, there was some sign of abating with prices closing lower each day since a week ago. NR price had fallen by six per cent in one week, but was still 37 per cent higher y-o-y.

“This is in line with our expectation that NR price may fall as the ‘wintering season’ of the rubber trees typically ends in May. We have assumed a 20 per cent quarter-on-quarter (q-o-q) drop in NR latex cost for the third quarter of 2011,” Lee opined.

Meanwhile, nitrile butadiene rubber (NBR) price had risen to US$1.65 per kilogramme in April 2011 due to rubber consumers’ unwarranted switch from NR to NBR. “We think the consumption pattern may revert once NR price falls in May, barring any jump in crude oil prices.”

“Nevertheless, we estimate that for the nitrile-latex glove pricing disparity to disappear, NBR price will need to increase by 50 per cent,” she added.

Based on the given factors, the research firm stated predominant nitrile glove producers like Hartalega would continuously show stronger q-o-q results while latex glove producers such as Top Glove would continue to post lackluster numbers.

In relation to that, it expected Hartalega to deliver a six per cent sequential earnings growth in the fourth quarter of financial year 2011 on higher sales volume. On the other hand, Kossan might post 10 per cent weaker sequential earnings in its first quarter results due to lower seasonal demand for latex gloves.

“We think Hartalega has the potential to trade up to Top Glove’s current valuation given the promising prospects for nitrile gloves, compared with the long-term negative outlook for latex gloves,” said Lee.

Maybank Investment pegged Hartalega target price at RM6.80 per share and Kossan at RM3.60 per share, while Top Glove was at RM5.10 per share.