• The US government's decision to increase tariff on Chinese gloves is seen as a positive catalyst for Malaysian glovemakers
• We see Hartalega and Kossan to be the biggest beneficiaries due to their significant presence in the US
• Maintain OVERWEIGHT rating on the sector on the back of improved sector earnings outlook and favourable supply-demand dynamics

Tariff increase on Chinese gloves, from 25% to 100% in 2026

On 13 Sept 24, the US government announced an increase in tariffs on Chinese surgical
gloves, setting the rates at 50% for 2025, before escalating to 100% in 2026 (from the current 25%). This move is intended to protect domestic workers and businesses from perceived unfair trade practices by China. Previously, the US had implemented a 15% tariff on China medical gloves starting in Sept19, which was later reduced to 7.5% in Feb19 as part of the US-China trade agreement. The tariff was temporarily suspended during Covid19 pandemic due to the classification of gloves as essential item. In May24, the US revised the tariff on medical and surgical gloves, increasing from 7.5% to 25%, effective in 2026.

Gradual positive for Malaysia

We view this development as a potential advantage for Malaysia glovemakers. The tariff increase is likely to prompt Chinese glovemakers to re-evaluate their expansion strategies, which should limit supply in the market. Historically, Chinese glovemakers have a cost advantage due to coal usage, but the higher tariffs are expected to raise costs and erode their cost advantage relative to Malaysia producers. Our projections suggest that the tariff increase could raise costs by c.US$12 per 1,000 pieces for Chinese glovemakers. However, Chinese glovemakers might redirect sales to other regions (ie: Europe and Asia) to maintain competitiveness. For context, the US market accounted for c.45-50% of Intco Medical, China’s largest glovemaker revenue in 2023. We expect a shift in US purchases from China to Malaysia, with Hartalega and Kossan poised to be major beneficiaries.

Opportunity knocks for local glovemakers

The US tariff increase could present opportunities for Malaysia glovemakers to gradually raise prices and recommission capacity. The average selling prices for Malaysia gloves is at US$19–21/k pieces, allowing room for potential upward adjustments. We forecast that global supply-demand will gradually improve over the next 2 years, potentially reaching equilibrium by 2026E. We estimate that Malaysia’s annual production output to reach 201bn-206bn pieces with a 50% global market share by 2026E. This growth is expected to be driven by 2 key factors, including 1) shift in customer preference away from Chinese suppliers, and 2) the depletion of post-Covid19 inventory following excessive restocking. We estimate global glove supply to be 402bn/403bn in 2025-26E, while global demand is expected to reach 368bn/405bn pieces in 2025–26E.

Maintain Overweight; Hartalega and Kossan the 2 largest beneficiaries

We maintain our OVERWEIGHT stance on the Rubber Glove sector on the back of improved earnings outlook and favourable supply-demand dynamics. Our sector top picks include Hartalega (BUY; TP: RM4.10) and Kossan (BUY; TP: RM2.60), both of which can benefit from their significant exposure to the US market at c.45-50% of respective revenues. Hartalega, in particular, stands to be the largest beneficiary, given its strong focus on medical gloves. We maintain our SELL rating on Top Glove (TP: RM0.60), which has a lower 15% US market exposure.

Source: Phillip Capital Research - 17 Sept 2024