CIMB Research said the increase in natural gas prices will have minimal impact on glove players as they will be able to pass on the additional cost to customers despite stiffer competition.
This, it added, was due to two factors — the price increase is not large and the lower rubber prices will help buffer the impact from the higher gas cost.
“We are not surprised by the price hike, given that it is the government’s stated intention to gradually cut subsidies. While a sudden increase in gas prices would hurt glove players (as they do not have sufficient time to adjust prices or inform their customers). The relatively small average rise of 2.3 per cent would have minimal impact on their bottom lines,” it said in its report yesterday.
Based on CIMB Research’s analysis, a five per cent change in natural gas price would only have a one to 3.7 per cent impact on the bottom lines of the glovemakers.
It said although the glovemakers may not be able to fully pass on the additional costs to their customers due to the stiffer competition, lower rubber prices could help buffer the negative impact from the gas cost hike.
“Natural gas makes up only six to seven per cent of the rubber glove manufacturers’ total operating costs. Natural gas is currently priced at RM19.32 per million british thermal units (mmbtu), substantially below the market price of RM55/mmbtu,” it said.
On Wednesday, Gas Malaysia announced that the government had approved a natural gas tariff revision for the non-power sector in Peninsular Malaysia effective November 1.
Following that, natural gas prices would be increased by an average 2.3 per cent, from RM19.32 to RM19.77 per mmbtu.
CIMB has a “neutral” call on the sector, with Hartalega Holdings Bhd and Kossan Rubber Industries Bhd as its top picks.
“While we believe that Hartalega will still emerge as the strongest in terms of profitability, given its huge margin buffer, it may face pricing pressure and more difficulty in passing on the higher costs to its customers, given its premium pricing.
“On the other hand, Kossan is in a better position to pass on these costs, given its more reasonable pricing and track record in producing nitrile gloves,” it said.