KUCHING: The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) is maintaining their negative stance on the glove sector due to continuous intense competition within the sector coupled with an oversupply of gloves that resulted from the normalising global glove demand.

Malaysian Rubber Glove Manufacturers Association’s (Margma) estimated global demand for 2023 is 300 billion pieces which is a sharp drop from the sector’s peak of 492 billion pieces in 2021.

The current estimates are seen to be normalising to pre-pandemic levels in 2018 and 2019 which saw global demand figures of 280 and 340 billion pieces respectively.

While certain buyers may engage in restocking activities, MIDF Research expected this to be a lacklustre development for the sector as most countries have transitioned to endemic phase of post-border reopening.

Similarly industry utilisation rate fell from 35 to 40 per cent in the fourth quarter of 2022 (4Q22) to 32-35 per cent in 1Q23 which was barely half of the 80 to 85 per cent industry utilisation rate seen in 2019.

Meanwhile the number of glove manufacturers seems to have increased from under 60 Margma registered members during prepandemic times to the current 90 members.

This further exacerbates the oversupply situation and while some new firms have exited the sector due to continuous losses, MIDF Research expects this to be a negligible effect due to their small production capacity in comparison with total global supply.

“Hence, we anticipate that the demand supply dynamic is unlikely to return to normal for at least the next one year on the back of low utilization rate, normalizing glove demand and continuous intense competition in the industry.

“Looking ahead, we project a 35 to 40 per cent industry utilization rate in 2023,” the analyst opined.

This poor utilisation rate coupled with compressed margins from the low average selling price (ASP) has cause manufacturers to fall in the red over the last few quarters. In response to this, the players have begun to raise ASPs to pass costs forward.

“Based on our channel check, China’s glove makers increased their blended ASP from US$14 per 1,000 pieces to US$16 per 1,000 pieces in the first quarter of 2023 (1Q23), equivalent to a 15 per cent increase,” MIDF Research shared.

Local manufacturers Hartalega Holdings Bhd (Hartalega) and Top Glove Bhd (Top Glove) are expected to follow suit in raising ASPs which is expected to bode well with expanding margins.

MIDF Research expects there to be limited room to fully pass on increased costs with higher ASPs in the near term due to current oversupply of gloves within the sector and asserts that they adopting a wait and see approach for consumer response to the ASP hikes.

“This is because clients may easily move to other firms due to an ongoing surplus of gloves on the market. We are also wary that the margin compression will persist in the near term on the back of the cost of production per unit remaining high due to the ongoing poor utilization rate,” the research arm explained.

Additionally, raw material prices are still predicted to be highly volatile in the near term with average prices of latex concentrate, acrylonitrile and butadiene experiencing a month over month (m-o-m) increase of 4.5, 10 and 25.8 per cent respectively.

Note that raw material costs account for around 34-37 per cent of total operation expenses within the gloves sector. Natural rubber gloves are formed mostly from latex concentrate while nitrile gloves are produced from a combination of acrylonitrile and butadiene.