KUALA LUMPUR: Kenanga Research expects the operating environment for the glove sector to remain challenging in subsequent quarters, plagued by massive oversupply, reluctance of customers to commit to sizable orders and hold substantial stocks.
The firm said the Malaysian Rubber Glove Manufacturers Association (Margma) had projected a 12 per cent-15 per cent growth in the global demand for rubber glove annually from 2023.
The association also believed that the supply-demand equilibrium might 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 to rise by 15 per cent per annum underpinned by rising hygiene awareness.
"Still, capacity is seen to expand further in 2023," Kenanga state in a note.
It projected the demand for gloves to rise by 15 per cent in 2023, which was 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 per cent to 595 billion 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 per cent to 137 billion pieces from 112 billion 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 sizable orders and hold substantial stocks on expectations of further decline in prices," it said.
Kenanga Research's 2023 forecasts assumes an average selling price (ASP) of US$20 per 1,000 piece, translating to an estimated 10 per cent decline over 2022.
It also estimated an average plant utilisation of 50 per cent versus an estimated 60 per cent in 2022.
"During the 2014/2015 downturn, ASP of nitrile gloves went as low as US$17/US$18 per 1,000 pieces while industry utilisation was at around 65 per cent-70 per cent.
"We advocate investors to avoid the sector for now, and not have any top pick for the sector," it added.
Kenanga Research gathered that some players were hopeful that the rate of decline in ASP is slowing, while others believe selling prices had bottomed.
Hopeful that selling prices have bottomed out, certain players will attempt to raise prices starting from March 2023 by an average of five per cent from ASP US$19-US$21 to US$20-US$22.
"We are uncertain if this is viable as we gathered from sources that Chinese players are still undercutting by selling as low as US$14-16 per 1,000 pieces."
The firm maintained an "Underweight" call on the sector.