We reiterate our UNDERWEIGHT rating on the sector. We expect the sector to continue to face a challenging and competitive business landscape ahead due to elevated costs, subdued average selling price and massive capacity leading to suppressed industry utilization rate. 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 the pivot is more likely to happen in 2024 and do not have any top pick for the sector.

Operating environment remains challenging throughout 2023. We reiterate our view that the challenging and competitive business landscape currently faced by the sector will persist throughout 2023. As such, we continue to expect players to incur losses moving into 2Q23 due to elevated costs of raw material, energy and labour against subdued average selling price (ASP/1,000 pieces of USD19-21 vs. cost/1,000 pieces of USD21-23), and massive capacity leading to suppressed industry utilization rate averaging 35%-40%. As gathered from our channel checks, some players are hopeful that the rate of decline in ASP is slowing, whilst others believe selling prices have bottomed. Hopeful that selling prices have bottomed out, certain players will attempt to raise prices from end-Mar 2023 by an average of 5%-10%, from ASP of USD19-21 to USD20-22 for the Mar to April shipments. We are uncertain if this is viable as we gathered from sources that Chinese players are selling at USD17 per 1,000 pieces. Furthermore, the prospect of raising ASP is challenging due to the current massive overcapacity situation. In view of the increasingly challenging business landscape, glove players are prioritising production at their newer and more efficient factories while temporarily leaving the older ones idle.

Oversupply to persist. We expect the challenging operating environment to persist in subsequent quarters plagued by massive oversupply, reluctance of customers to commit to sizeable orders and hold substantial stocks. MARGMA projects 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 six to nine 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 equilibrium in 2025 when there is virtually no more new capacity coming onstream while the global demand for gloves continues rising 15% per annum underpinned by rising hygiene awareness. Still, capacity is seen to expand 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 another 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 evaporated - finally come on-line. This will result in the excess capacity rising by 22% to 137b pieces from 112b pieces in 2022. The expanded 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 from 2022, and (ii) an average plant utilisation of 40% 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 around 65%-70%.

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

Source: Kenanga Research - 10 Apr 2023