Joe Biden was officially inaugurated as the 46th President of the United States (POTUS). This is extremely good news as far as getting the COVID pandemic in the US under control is concerned.

 

One of the very first actions the new president took was issue a 200-page National Strategy for the COVID-19 Response and Pandemic Preparedness document. You can find the full text here. That document outlines 7 main goals, and one of them is of particular interest to me, and it should be of particular interest to Malaysia as a whole. Goal Four's focus is to "immediately expand emergency relief and exercise the Defense Production Act." I don't claim to be an expert in the Defense Production Act (DPA) and its provisions, but in broader terms it gives authority to the POTUS and any directly authorized government agencies to direct production and supply chains in the country in a manner seen most suitable in emergency situations. For instance, last year, in the beginning of the pandemic, President Trump was about to use the Act to direct car manufacturers to produce medical ventilators, before General Motors stepped up and volunteered to do it. In this particular case, the Act will be used to "force" manufacturers in the US to start producing pandemic-related supplies, including anything from simple things such as sample collection swabs to laboratory analysis machines for PCR tests. In total there are 12 categories of items outlined, one of which is nitrile gloves (page 69-70 of the report).

 

 

As we have previously discussed, the US practically doesn't have its own national production of nitrile gloves, and it sources the vast majority of the country's supplies from Malaysia. Thus, the actual plan of the Biden administration becomes clearer in the outlines of the corresponding "Executive Order on a Sustainable Public Health Supply Chain." You can find the full text of the Executive Order here.

 

The US will go through the following phases in the shortest period of time:

- Assess the inventory of PPE on hand;

- Work out the pricing for each item on the list, prioritizing the most urgent ones;

- Design a long-term strategy for sustainable supplies, beyond COVID, especially in regards with foreign suppliers;

- Build up the strategic national stockpile.

 

Note that all of these orders are accompanied by words such as "immediately" and "promptly". Thus, we can expect that work on all of that has already started.

 

I have mentioned a few times before that the PPE in the shortest supply in the US, is nitrile gloves (see for instance here). Thus, undoubtedly one of the very first things that will be reported during the inventory assessment would be the problem with procuring nitrile gloves. Two companies stand to potentially benefit the most - Top Glove and Supermax.

 

In July, the US imposed bans on imports from two subsidiaries of Top Glove over alleged forced labor practices. According to the company, the outlined issues have been resolved and they are currently waiting for an independent international consultant's review before the ban gets lifted. Now it is highly likely that the process will be streamlined even further. Three notes on Top Glove you should pay attention to:

 

- The results for 1QFY21 (ended November 2020) were achieved on flat sales volume q-o-q, and even more amazingly - on a drop of 2% in sales in North America y-o-y (i.e. lower sales in COVID times than in pre-COVID times);

 

- The delivery time for nitrile gloves orders has decreased from 510 days in November 2020 to 300 days in January 2021; this has happened not because of order cancelations, but because of expanded capacity - both organically, and through conversion of production lines;

 

- The company keeps 30% of its production for spot orders at present - by far the largest percentage among the Big 4 (~5-10% of capacity kept for spot orders by the rest). Spot order ASPs for nitrile gloves are about twice higher than for regular orders.

 

See the company's Investor Presentation from 19 January 2021 for reference, here.

 

In December, Supermax officially incorporated a subsidiary in the United States with Plant #18 being built on US soil in order to produce "Made in USA" nitrile gloves (see here). Supermax already commands incredibly high profit margins (60% PAT, 77.6% PBT for the last quarter), so such a move can only strenghten its position long-term. The total glove production capacity of the company is expected to almost double by 2022 to 48.42 billion pieces per year, more than 2/3rds of which is concentrated in nitrile glove production. Thus, the company will continue producing the highest profit margin product, and it will continue selling it to clients ready to pay top dollar.

 

 

Important disclaimer: Any views expressed are for informational and discussion purposes only. None of this information is intended as, and must not be understood as, a source of advice. It is imperative that you always do your own research and that you make any decisions based on your personal situation and your own personal understanding.