Rubber Gloves - Minimal impact from price hike
Recommendation: Neutral
We believe the sudden increase in natural gas prices will only have minimal impact on glove makers given that (i) the price increase is not large, and (ii) the lower rubber prices will help to buffer the impact from the higher gas cost. Despite the stiffer competition, we believe glove players would still be able to pass on part, if not all, of the additional cost. As any potential impact on the bottom line is likely to be minimal, we maintain our earnings forecasts and Neutral rating on the sector. Kossan remains as our top pick as we believe it will fare better than its rivals amid the keener competitive environment.
What Happened
Yesterday, Gas Malaysia announced that the government has approved a natural gas tariff revision for the non-power sector in Peninsular Malaysia effective 1 November 2014. According to the announcement, natural gas prices will be increased by an average 2.3%, from RM19.32 to RM19.77 per MMBtu.
What We Think
We are not surprised by the price hike given that it is the government’s stated intention to gradually cut subsidies. Natural gas is currently priced at RM19.32 per MMBtu, substantially below the market price of ~RM55/MMBtu. While a sudden immediate increase in gas prices would hurt glove players (as they do not have sufficient time to adjust prices or inform their customers), we think the relatively small average rise of 2.3% would have minimal impact on their bottom lines. Although the glove makers may not be able to fully pass on the additional costs to their customers due to the stiffer competition, lower rubber prices could help to buffer the negative impact from the gas cost increase. In any case, natural gas makes up only 6-7% of the rubber glove manufacturers’ total operating costs. Based on our analysis, a 5% change in natural gas price would only have a 1-3.7% impact on the bottom lines of the glovemakers.
What You Should Do
Choose the right company. 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 hence, more difficulty in passing on the higher costs to its customers given its premium pricing. Kossan, on the other hand, is in a better position to pass on these costs given its more reasonable pricing and track record in producing nitrile gloves.
Source: CIMB Daybreak - 30 October 2014,
Recommendation: Neutral
We believe the sudden increase in natural gas prices will only have minimal impact on glove makers given that (i) the price increase is not large, and (ii) the lower rubber prices will help to buffer the impact from the higher gas cost. Despite the stiffer competition, we believe glove players would still be able to pass on part, if not all, of the additional cost. As any potential impact on the bottom line is likely to be minimal, we maintain our earnings forecasts and Neutral rating on the sector. Kossan remains as our top pick as we believe it will fare better than its rivals amid the keener competitive environment.
What Happened
Yesterday, Gas Malaysia announced that the government has approved a natural gas tariff revision for the non-power sector in Peninsular Malaysia effective 1 November 2014. According to the announcement, natural gas prices will be increased by an average 2.3%, from RM19.32 to RM19.77 per MMBtu.
What We Think
We are not surprised by the price hike given that it is the government’s stated intention to gradually cut subsidies. Natural gas is currently priced at RM19.32 per MMBtu, substantially below the market price of ~RM55/MMBtu. While a sudden immediate increase in gas prices would hurt glove players (as they do not have sufficient time to adjust prices or inform their customers), we think the relatively small average rise of 2.3% would have minimal impact on their bottom lines. Although the glove makers may not be able to fully pass on the additional costs to their customers due to the stiffer competition, lower rubber prices could help to buffer the negative impact from the gas cost increase. In any case, natural gas makes up only 6-7% of the rubber glove manufacturers’ total operating costs. Based on our analysis, a 5% change in natural gas price would only have a 1-3.7% impact on the bottom lines of the glovemakers.
What You Should Do
Choose the right company. 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 hence, more difficulty in passing on the higher costs to its customers given its premium pricing. Kossan, on the other hand, is in a better position to pass on these costs given its more reasonable pricing and track record in producing nitrile gloves.
Source: CIMB Daybreak - 30 October 2014,
