The plunge in global rubber prices to almost a five-year low currently may seem like a boon to many rubber glove manufacturers given the cheaper raw material that represents nearly half of their total production costs, which could result in better profit margins in the coming quarters.
This notion, however, is quickly dismissed by local rubber glove makers, which of late had to succumb to other cost increases such as the electricity and gas tariff hikes this year, as well as the minimum wage policy.
According to rubber glove industry players contacted by StarBiz, the quantum of profit among rubber glove manufacturers had generally been quite stable in recent years despite the current fluctuations in rubber prices.
“Judging from how rubber prices have fallen by 20% in the fourth quarter last year and first quarter this year, glove players’ profitability are not directly linked to lower global rubber prices alone.
Therefore, glove manufacturers are constantly finding ways to fairly translate it into a balanced selling price to the customers, added Lim.
“Even if the raw material prices were to hit rock bottom coupled with the collective increases in other costs, local rubber glove players normally have been able to pass the cost back to the customers,” Lim said.
He is positive that industry players’ earnings growth would resume in the subsequent quarters, underpinned by new capacity expansion fuelled by sustained demand for rubber gloves, the weakening of the ringgit against the US dollar, which is positive to rubber glove players, and the sustained low raw material prices.
On the other hand, industry analysts are predicting that the ease of cost pass-through is gradually fading given the shift in pricing power to buyers, which is most evident in the downtrend of average selling prices for both natural rubber and nitrile gloves.
However, they said the rubber glove manufacturers’ earnings were not likely to experience a sharp fall as the higher costs would be partly cushioned by internal efficiency programmes and robust growth of 8% in global rubber gloves demand every year.
While expectations of a strengthening US dollar in relation to the ringgit may diffuse exchange rate pressure, the greater risk of exchange rate volatility and hedging activities by some manufacturers will only increase glove makers’ currency risk and make them worse off.
According to Kossan Rubber Industries Bhd managing director and CEO Datuk Lim Kuang Sia, while hedging activities have helped glove manufacturers to mitigate some of their losses, however, “it is only beneficial when the manufacturer has secured a contract.”
“When you hedge for rubber (raw material), you are actually taking a great risk.
“Hedging is good for longer durations. But for now, while the rubber price is falling, we are not hedging,” explained Kuang Sia.
Rubber as the main raw material currently represents about 40% to 45% of Kossan’s total cost of production for gloves.
Kwee Shyan said that domestic glove manufacturers had been actively increasing automation capacities to optimise their production and gloves quality.
He recalled that some 20 years ago, it took about 20 workers to generate one million pieces of standard rubber gloves.
Through increased automation, it now takes about four to six workers for the production of the same number of gloves.
“The investment in automation has assisted in mitigating our huge dependency on labour and its increasing wage costs,” said Kwee Shyan.
On a different note, he said Margma was seeking the Government to consider the association’s appeal for an extension of the reinvestment allowance for glove manufacturers to enhance and improve their plants.
The original reinvestment allowance is only valid for 15 years, which most mature glove manufacturers had long used up.
Margma is now seeking for an extension of another 10 to 15 years for the reinvestment allowance.
“While the Government’s argument is that the local rubber gloves is already a well matured industry, we believe that the industry players still have a lot to do and will need to further automate their operations in order to stay competitive and ahead of competition from other overseas players,” said Kwee Shyan.
“We also know that the cost increases are bound to happen, but the uncertainty for us is when and by how much ? ”
However, on the bright side, he said the gloves manufacturing sector would grow in tandem with the healthcare sector, which in turn was dependant on the country’s economy. “As striving economies drive the need for better healthcare, Malaysia will stand to benefit given its status as the world’s largest latex glove manufacturer in the world.”
Among the top world class glove makers based in Malaysia include Top Glove Corp Bhd, Supermax Corp Bhd, Kossan and Hartalega Holdings Bhd.