- An article in The Edge Financial Daily today highlighted the rubber glove manufacturers’ concerns over a drastic pullback in energy subsidies, particularly for natural gas.

- The renewed fear came about following the government’s move to raise petrol prices this week. Back in 2011, the Performance Management and Delivery Unit (Pemandu) had devised a plan to raise local gas prices to be on par with that of global market prices.

- The prices for RON95 and diesel have been upped by 20 sen each while RON 97 price was increased by 15sen.

- At present, energy (electricity, natural gas and biomass) costs make up 10%-12% of the rubber glove makers’ total production costs. Along with raw materials (50%-60%) and labour (11%), they form the bulk of expenses.

- The article had quoted Top Glove Corp’s MD, Mr. Lee Kim Meow and the Malaysian Rubber Glove Manufacturer’s Association (Margma) as saying that a gradual hike (e.g. the current plan of a half-yearly price revision of +RM3/mmbtu) will be preferred to a sudden raise as the higher costs may then be passed on to its customers in a timely manner. (Orders are made, on average, 2-3 months in advance)

- They believe that a sharp upward price revision will only make the Malaysian gloves uncompetitive. As it is, the glove manufacturers had to raise selling prices by ~3% to combat the rise in labour costs from the minimum wage ruling in January this year.

- Nonetheless, we note that Malaysia commands ~63% of the world’s supply of rubber gloves and thus, have some bargaining power. In addition, the RM’s depreciation against the USD (-7% YTD vs THB’s -5%) has kept exports competitive while glove demand has remained robust.

- The cut in petrol subsidy came as a slight surprise to us as we had not expected any subsidy pullbacks in 2H13. Our channel checks have also earlier revealed that any fuel subsidy rationalisation would most likely only be announced in 1Q14. A reprieve for the glove players would come from Tenaga Nasional Bhd’s recent announcement of no power tariff revision until it resumes its fuel cost pass-through (FCPT) mechanism next year.

- All in all, we maintain our OVERWEIGHT stance on the sector as key factors affecting the industry are in their manufacturers’ favour, namely:- (1) low and stable raw material prices (latex: -8% YTD); (2) strong global glove demand (2013: +12%); and (3) strengthening of the USD against the RM. Top Glove Corp (FV: RM7.15/share) and Kossan Rubber Industries (FV:RM6.30/share (U.R.) remain our top BUYs.

Source: AmeSecurities