Rubber glove prices may rise again with the new Covid-19 variants spreading rapidly
Following the outbreak of the novel coronavirus in Wuhan, China, in late December 2019, there was a sudden explosion of demand for healthcare products, including rubber gloves globally, by April 2020. This created a chronic shortage of rubber gloves.
Malaysia is the world’s largest maker of rubber gloves, producing 67 per cent of total glove consumption globally. It exports to over 195 countries. The country is also overwhelmed with demand, having to cope with an order waiting list of more than a year for significant glove players compared to the standard delivery time of 30-40 days.
In fact, the country has supplied 240 billion pieces of rubber gloves worldwide, meeting almost 70 per cent of the 360 billion pieces of world demand in 2020. In the first quarter of 2021 alone, Malaysian producers reported record sales exporting 53 billion gloves.
The Malaysian Rubber Glove Manufacturers Association (MARGMA) projects the rubber glove annual demand to grow to between 15 and 20 per cent with export revenue of RM34 billion in 2021. The global market is set to hit 420 billion gloves.
As a result, local glove players saw their revenues and net profits surge in 2020. It sent share prices sky-high as investors were bullish over the high demand for gloves and the reopening of economic activities after the first movement control order (MCO 1.0).
By July 2020, last year, four months after the Covid-19 pandemic worsened worldwide, investors had poured more than RM60 billion into the top seven glove listed counters on Bursa Malaysia. They were Hartalega Holdings Berhad, Top Glove Corp Berhad, Kossan Rubber Industries Berhad, Supermax Corp Berhad, Careplus Group Berhad, Rubberex Corp (M) Berhad, and Comfort Gloves Berhad.
Thus, the glove tycoons who owned substantial stakes in these companies witnessed an astounding increase in their wealth.
Even other listed companies have been jumping on the rubber glove bandwagon, branching out from their core businesses and into rubber-glove making. They are Luster Industries Berhad, a manufacturer of precision plastic parts, property developer Mah Sing Group Berhad, Salcon Berhad and Jiankun International Berhad among others.
But the bullish trend in share prices did not last as the prices of glove counters started to plunge following the rollout of vaccines globally towards the end of last year. Competition and a falling average selling price (ASP) made it worse. The tycoons too, who control these companies, have seen their wealth dive
According to Maybank Investment Bank Bhd (Maybank IB) analyst Wong Wei Sum, the glove sector is entering a declining ASP (and hence profits) trend on increased supply and rising vaccination rates. In addition, competition is intensifying among both existing and new entrants.
In a sector review in July, Maybank Kim Eng’s Head of Regional Equity Research Anand Pathmakanthan highlighted that the ASP was falling much faster than expected. Hence, glove makers’ earnings outlook was much less bullish than six months ago.
On top of that, Anand pointed out that there is also a new significant global supplier of gloves emerging from China. This would have negative implications for the longer-term earnings growth and valuation multiples of the rubber glove sector.
Echoing that, Fortress Capital Asset Management CEO Thomas Yong had told The Edge there was no longer any acute demand for gloves. This is because vaccination rates in advanced countries such as the US and Europe, the main revenue contributors to Malaysian glove companies, have picked up pace. The number of active cases has dropped. Thus, only a moderate demand is seen for gloves.
Philip Capital Sdn Bhd Chief Investment Officer Ang Kok Heng noted the glove sector ASP was coming down as more players entered the market. Ang expects glove makers’ profits and share prices to normalise to pre-pandemic levels after one to two years.
However, with the recent resurgence in Covid-19 cases globally due to the spread of the more contagious Delta variant, glove stocks have started to gain momentum again.
The Delta variant, first identified in India, has shown to be airborne, more transmissible and can spread in five seconds. It can cause more severe sickness. This mutated variant has caused countries around the world to reimpose new lockdowns.
AmInvestment Bank Research in a sector update opined the rising Delta cases might prompt glove counters to react optimistically in the short term. It would also slow the fall in glove ASP as glove urgency is buoyed by the rise in cases.
The research house added that the lower rate of fall in ASP would help support earnings in the next 12 months. In addition, it also expects the glove ASP to stabilise at US$30-35/1,000 pieces before tapering off far more gradually, moving forward.
Going forward, would the share prices of glove stocks rebound, and would the glove tycoons be able to increase their wealth again in the coming months? — The Health