KUALA LUMPUR: The average selling prices (ASPs) for rubber gloves have bottomed and bounced from a low seen on January 23, according to recent channel checks by CGS-CIMB Research with domestic glove makers.
"We note that ASPs for nitrile were quoted at US$18–19 (per 1,000 pieces) on March 23, up from a low of US$15–16 seen previously.
"Yet, the selling price hikes are to pass on higher production costs, such as labour, electricity and natural gas.
"In our view, the ASP hikes are sustainable as most, if not all, glove makers (including the Chinese) are raising ASPs collectively.
"Based on our estimates, ASPs for Malaysian glove makers could reach pre-pandemic levels of US$21–22 by the third quarter (Q3) of 2023," the research firm said.
Further, CGS-CIMB Research also noted that at this juncture, the research firm estimates that the Malaysian glove sector's utilisation rate remains low at 35 to 40 per cent.
This is mainly due to a supply glut in the sector, with buyers preferring to take a wait-and-see approach to inventory restocking.
"In light of the ASP hikes, we believe this will further encourage glove buyers to hold back purchases in the near term, given the plethora of gloves in the market.
"We expect this to weigh down the utilisation rate of the Malaysian glove sector, which is likely to stay at current levels (if not fall lower) up until the fourth quarter (Q4) of 2023," the research firm said.
CGS-CIMB Research said the quantum of ASP hikes is insufficient to pass on the higher costs fully.
As a result, the research firm expects glove makers to report losses to their bottom line until the first quarter (Q1) of 2024.
This is despite narrowing losses on a quarter-on-quarter (QoQ) basis from the second quarter (Q2) of 2023 onwards, with losses likely to peak in the first quarter (Q1) of 2023.
"In our view, glove makers can only post positive bottom lines if the utilisation rate improves to 55–60 per cent, backed by a recovery in purchases from buyers, ASPs improve to US$24–25 (per 1,000 pieces), and there are no further increases in cost beyond current levels.
"In addition, we believe that glove makers are only likely to return to pre-pandemic bottom lines in 2025, at the earliest," CGS-CIMB Research said.
Maintaining an 'Underweight' call for the sector, the research firm said the recent rally in share prices provides a good opportunity for investors to take profit as sector fundamentals remain weak at this point and the risk-reward profile of the sector remains unfavourable.
"We believe investors are overly optimistic in terms of earnings recovery in the next 12 months as ASPs are unlikely to recover to the operational breakeven point.
"Hence, we see further downside revisions to consensus earnings for the next three quarters, as earnings downside remains evident at this juncture," the research firm said.