MOVING away from the mathematics of average selling price (ASP) reasoning, the shift from the urgent demand for rubber gloves can be traced to improving situation of the COVID-19 pandemic in developed countries.
For a starter, the number of new COVID-19 cases in the US and the European countries have declined drastically since the peak in 1Q CY2021.
On top of that, the COVID-19 vaccination programmes in developed countries continue to accelerate. According to Our World in Data, the UK has over 60% of its population vaccinated at least once while the US, Italy and Germany has about half of their population receiving at least one COVID-19 vaccine shot.
Such high vaccination rate implies that the dependency on rubber gloves in these countries may slow down, thus piling further pressure on ASP going forward, according to MIDF Research.
“For example, ASP in the North American market for nitrile rubber gloves can fetch about US$10 higher compared to other markets,” justified analyst Ng Bei Shan in a sector update.
“The US is known to have the highest consumption per capita at 281 gloves in 2019. This is followed by UK (133), Italy (129), Germany (120) and Japan (112).”
Compared to end-2020, MIDF Research noted that spot ratios for rubber gloves have eased, which means that the urgent orders for rubber gloves might be subsiding.
“Based on channel checks, glove makers have lower spot allocation compared to one to two quarters ago. Some are focusing solely on contractual orders,” observed the research house.
“Meanwhile, pricing for contract orders are softening at a gradual rate as a result of the ever-changing demand and supply dynamic.”
One of the factors is that buyers are adopting a wait-and-see approach as they try to reduce their risk of holding high-price inventory. Although it expects prices to stay above pre-pandemic level, MIDF Research foresees that once the urgency for gloves subsides, their ASPs are likely to tilt lower.
Additionally, the research house is also concerned that higher capacity would contribute to easing in demand for urgent orders.
“We expect demand for gloves to remain strong but the dwindling urgent requirement for rubber gloves is likely to tone down high ASPs,” projected MIDF Research. “In fact, demand for gloves is expected to continue to outstrip supply into 2022. The tide is anticipated to turn in 2023.”
As a whole, the research house has downgraded the glove sector to “neutral” (from “positive previously) in line with its view that the upcycle of the sector is coming to its tail end.
“As such, we believe that profitability is likely to normalise in tandem with the lower ASP,” said MIDF Research. “That said, the demand for gloves is likely to remain healthy due to higher hygiene awareness and better healthcare practices.”
Following the changes in its assumptions and earnings estimates, the research house has also downgraded the Big-Four glove makers, namely Hartalega Holdings Bhd, Kossan Rubber Industries Bhd, Supermax Corp Bhd and Top Glove Corp Bhd to “neutral” (from “buy” previously”) due to limited upside in capital gain.
“Among the stocks, we prefer Hartalega for its above-industry profitability and its focus on product differentiation and innovation,” added MIDF Research. – June 24, 2021
