Higher vaccination rate globally and stronger incoming capacities have resulted in falling glove ASPs in the past 6 months. We expect the ASP downtrend to continue as we head into 1H22, albeit at a slower rate, given that prices have now fallen closer to pre-pandemic levels. Margin compression is also expected in 1H22, in view of the higher operating costs (due to better social compliance practices and stricter SOPs) and ASPs declining at a faster rate than raw material prices. In our view, the headwinds faced by the industry currently are likely to stay in 1H22. However, with the larger cash pile accumulated during the upcycle, we opine that the glove makers under our coverage are at a better position to withstand the current challenging climate along with an impending price war. Sales volume should also recover gradually as ASPs inch closer to pre-Covid levels in 1H22. With that, we maintain our NEUTRAL rating on the rubber gloves sector.

ASP downtrend to persist. Glove ASPs have been on a downtrend since mid-2021, following the mass rollout of vaccination programmes in major glove consuming countries, as the better vaccination coverage has greatly alleviated buyers’ urgency to stock up on gloves. As we move into 1H22, glove prices are expected to continue trending downwards, but at a slower pace of c.5% MoM (vs 10% MoM previously), as glove prices have fallen closer to pre-Covid levels (current ASP: USD25-35 per thousand pcs; pre-pandemic ASP: USD21 per thousand pcs). We also note that the pricing difference between the US market and EU market is also narrowing, at c.USD5 difference now, as opposed to a USD10 gap earlier. In our view, glove prices are likely to reach pre-Covid levels by 2Q22.

Raw material prices. The spike in glove demand previously has resulted in NBR latex prices to more-than-double to a high of c.USD2.40/kg in early-2021, but has since tapered off, in tandem with the weaker glove demand. NBR latex prices are expected reach pre-Covid levels of c.USD1.10/kg in early-2022, as glove demand continues to normalise and additional supply capacity kicks in. NR latex prices, however, are expected to stay elevated in 1H22, given the La Nina phenomenon expected in January 2022, followed by wintering period that typically lasts from February to May.

Margin compression. With ASPs declining faster than raw material price, coupled with higher operating costs stemming from better social compliance practices and stricter SOPs, margins for the glove makers are expected to compress further. Not to mention that the impending price war arising from Chinese glove makers attempting to win market share could also exacerbate the situation further. Nevertheless, we are comforted by the fact that the glove makers under our coverage have accumulated a large war chest during the upcycle and the strong balance sheet should help the glove producers to better weather through this difficult time.

Volume should pick up once ASP stabilizes. Amidst the falling ASPs, glove buyers have refrained from stocking up on gloves, to avoid locking in purchases at high prices. However, with glove prices slowly approaching pre-Covid levels, we think that restocking activities could gradually resume in 1H22. That said, we expect utilisation rate for the glove producers to still remain below pre-Covid levels of 80-85% in 1H22, due to overall softening in demand.

Maintain NEUTRAL. Current headwinds faced by the glove makers are unlikely to dissipate in the near future and we expect the operating environment for glove makers to remain challenging in 1H22. However, strong cash position should help the glove makers to navigate through this challenging times and withstanding any impending price wars that might come their way. Maintain NEUTRAL on the glove sector.

Source: Hong Leong Investment Bank Research - 20 Dec 2021