Reiterate UNDERWEIGHT. The massive overcapacity in the global glove market means that low selling prices and depressed plant utilisation will likely persist throughout 2023. Adding salt to the wound is the reluctance of customers to commit to sizeable orders and hold substantial stocks on expectations of further decline in prices. We beg to differ from the view of Malaysian Rubber Glove Manufacturers Association (MARGMA) that the industry will turn the corner in 2023 as our demand supply forecast shows that it will take at least another two years of consistent demand growth to fully fill the current excess capacity in the industry. We believe that the pivot is more likely to happen in 2024 and do not have any top pick for the sector.

We are less optimistic than industry players. MARGMA projects a 12%-15% growth in the global demand for rubber gloves annually from 2023, following an estimated 19% contraction to 399b pieces in 2022. It believes the supply-demand equilibrium may return in 6-9 months. However, we beg to differ, expecting the overcapacity situation to persist at least over the next two years.

Based on our estimates, the demand-supply situation will only start to head towards an equilibrium in 2025 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness.

Overcapacity to widen further in 2023. We project the demand for gloves to rise by 15% in 2023, which is consistent with MARGMA’s forecast. However, this will do little to ease the overcapacity situation as the global glove production capacity will grow by 16% to 595b pieces during the year as more capacity planned by incumbent and new players during the pandemic years—enticed by super-fat margins that had eventually evaporated—finally comes on-line. This will result in the excess capacity rising by 22% to 137b pieces from 112b pieces in 2022. The widened overcapacity means low prices and depressed plant utilisation will likely persist in 2023.

Not helping the already dire situation is the reluctance of customers to commit to sizeable orders and hold substantial stocks on expectations of further decline in prices.

Our 2023 forecasts assume: (i) an ASP per 1,000 pieces of USD20, translating to an estimated 10% decline over 2022, and (ii) an average plant utilisation of 50% vs. an estimated 60% in 2022. During the 2014/2015 downturn, ASP of nitrile gloves went as low as USD17/USD18 per 1,000 pieces while industry utilisation was at 65%/70%.

We advocate investors to avoid the sector for now and not have any top pick for the sector.

Source: Kenanga Research - 6 Jan 2023