MALAYSIA: Overcapacity concerns in gloves sector misplaced, says Affin Hwang

Concerns over a possible overcapacity among the 'Big Four' Malaysian glove makers may be misplaced given that the risk is manageable and can be mitigated by slowing down expansion plans in order to match current demand, said Affin Hwang Capital Research.

In a note on 15 April 2016, the research house said that overcapacity risk is more likely to escalate from the year 2018 onwards.

“Assuming global glove demand were to grow at an annual 9%, incoming supply will only outstrip demand at a net surplus of 2.4 billion pieces of 1% of the total global demand. To put it in perspective, 2.4 billion is equivalent to roughly a single plant's annual production capacity,” it explained.

According to Affin Hwang, key growth drivers for global rubber glove consumption include higher hygiene standards, progressive healthcare reforms and demand growth from emerging markets. It estimates demand to grow between 8% to10% on a yearly basis based on these catalysts, which translates to an additional 55 billion pieces of gloves for the next five years.

“This means that the volume growth outlook will remain intact while companies are able to keep utilization levels high. Malaysian manufacturers supplied about 63% of the world's total gloves in 2015 and are prime beneficiaries of growing global glove demand,” it said.

Affin Hwang expects the 'Big Four' glove makers – Kossan, Top Glove, Hartalega, and Supermax – to increase their total effective capacity by 13% on an annually compounded basis over the next three financial years (FY16-FY19).

However, declining average selling prices (ASPs) for gloves should continue to be an ongoing theme given the capacity influx, heightened competition and the ringgit's strength.

While margin compression remains a key concern, companies have taken steps to ease margin pressure, which includes entering into hedging contracts and implementing operational improvement initiatives, it said.

The research house has maintained its 'neutral' rating on the rubber products sector.

Source: Daily “The Star”, Kuala Lumpur; 15 Apr 2016

(Syed Rashid Ali, Karachi, Pakistan)