Malaysia’s glove manufacturers are expected to benefit from rise in the ringgit’s exchange rate as rubber gloves sales are mainly transacted in US dollar.
The research arm of TA Securities Holdings Bhd (TA Research) said Malaysia’s glove manufacturers face main rivals such as Thailand, Indonesia and China.
However, based on a year-on-year performance comparison, the US dollar/ringgit rate which was an increase of 5.7 per cent, year-on-year (y-o-y) has increased the most amongst these main Asian glove manufacturing countries.
This is followed by US dollar/Indonesian rupiah at 3.2 per cent y-o-y, US dollar/Chinese yen at 2.6 per cent y-o-y, and US dollar/Thai baht at 0.4 per cent y-o-y.
“Essentially, this provides local manufacturers with an advantage in terms of pricing. It would be cheaper for customers to purchase products from Malaysian rubber glove manufacturers,” TA Research opined in its note yesterday.
Glovemakers will also continue to see resilience in the year to come as demand for gloves stay buoyant on greater awareness for health and hygiene needs in developing countries that could lead to an increase in glvoe usage.
Glove manufacturers are also expanding their capacity to improve their product mix, which could in turn lift revenue and earnings.
“We are of the view that the additional supply of gloves will be absorbed by demand (mainly nitrile gloves) and do not foresee severe overcapacity issues in the coming one or two financial years,” said RHB Research Institute Sdn Bhd (RHB Research) in its Market Strategy 2015 report.
“Competition is getting stiffer, as the gloves manufacturers are expanding aggressively. They may face the risk of margins erosion in such a competitive environment. Hence, efficiency is the key to outperforming peers.”
The research firm expect overall demand for gloves to grow at an annual rate of eight to 10 per cent over the next two to three years.
This is expected to be backed by natural organic growth from larger markets like the US and EU, as well the rising awareness of healthcare in developing nations.
“As most of the revenue from rubber products manufacturers are derived from the export sales, the strengthening of the US dollar to ringgit rate is in their favour.
“Stronger exchange rates will translate into higher revenue (and part of their costs are in ringgit. Hence, we could possibly see an improvement in margins for these companies.”
On operations of Malaysia’s glove manufacturers, TA Research noted that rubber glove manufacturers have cost-pass through mechanisms in place.
“In the event of cost increases, companies will pass on the burden of cost to customers. Likewise, cost savings are relayed back in the form of lower average selling prices (ASP),” it said.
Nonetheless, TA Research viewed that this would depend on the demand and supply equilibrium at a specific point in time.
“Anticipating increased competition, manufacturers may not have the luxury of holding back cost savings from customers. Arguing from this angle, we expect the stronger US dollar to have a neutral impact on manufacturers.”