KUALA LUMPUR: Malaysian glove producers are now viewed as marginal cost producers, from their position as cost leaders prior to the Covid-19 pandemic.
Analysts said said local players’ earnings margins are not going to recover to pre-Covid-19 levels until at least 2028, mainly due to the oversupply faced globally.
“The ongoing oversupply situation in global gloves, coupled with a shift in cost profiles, especially around fixed costs such as labour and energy, relative to newer China-based producers, has made Malaysian glove producers the marginal cost producers from cost leaders in the pre-Covid-19 days.
“By our estimates, new capacities by Chinese producers outside China to avoid US tariffs could add 17.2 per cent or 84 billion, to global supply by 2027, providing further headwinds to market equilibrium and margin recovery,”
CGS International Securities Malaysia Sdn Bhd noted.
According to the firm’s estimates, local glove producers’ earnings levels are set to increase US$0.5 per annum over 2024 until 2027 but even then, earnings per 1,000 pieces will still be 33 per cent below US$3, which is the market share weighted average between 2012 and 2019.
This is due to the oversupply situation as well as Chinese producers’ willingness to accept lower margins in an effort to expand market share.
“We expect the global glove market to remain in oversupply until 2029. Our channel checks found that global producers are decommissioning legacy plants to ease the 30 billion pcs oversupply from 2024.
“However, Chinese glove producers are building new capacity totalling an estimated 84 billion pieces of annual production capacity outside of China, which we expect to fully come online by end-2027. Assuming eight per cent year-on-year demand growth, as experienced in 2012-2019, we expect the global market to achieve equilibrium by 2029 at an annual supply level of 570 billion pieces,” it said.
The firm added that local glove players are now more vulnerable to demand-supply dynamics. The shift is driven by higher fixed costs from the removal of energy subsidies and higher labour costs in Malaysia.
Among Malaysian glove producers, the firm said Top Glove Corp Bhd has a cost structure similar to its Chinese peers, with Hartalega Holdings Bhd and Kossan Rubber Industries Bhd potentially catching up by 2027.
“We reduce our sector core net profit estimates by 12 per cent, 11 per cent and 11 per cent for 2025, 2026 and 2027, as we believe the sustained oversupply worldwide will continue to weigh on margins.”
The firm reiterated its ‘Underweight’ call on the gloves sector, as the sector price-to-earnings ratio for 2027 is 19.1 times more than prices in the earnings recovery.
“Poor results and less-than-ideal outlook statements from Hartalega and Kossan in November could also have negative implications on share prices and valuations.”
The firm said key upsides for the sector could be another global pandemic driving a demand surge, accelerated removal of legacy glove manufacturing capacity, depreciation of the ringgit against the dollar, which could boost profits and further shifts in global tariff structures impacting non-Malaysian producers.
© New Straits Times Press (M) Bhd
