Giving its outlook on sectors as we come to the end of 2023, MIDF gives a rather neutral tone for the rubber glove industry for 2024. With raw material costs likely remain elevated in 2024, which typically account for 30-40% of the total production cost has brought the 3-month average futures commodity prices for the key glove raw materials down from the 2-year peak level but remained elevated on a year-to-date basis.
Notably, there has been an upward trend in NR Latex Concentrate Price, Butadiene, and Acrylonitrile. This is consistent with the higher Brent crude oil price in CY23. Moving into 2024, the house foresees higher Acrylonitrile and Butadiene prices, mainly due to elevated crude oil prices, which may result in higher production costs. Recall that Acrylonitrile is derived from crude oil refining, while Butadiene typically comes from the cracking of hydrocarbons in crude oil or natural gas. Therefore, MIDF anticipates slightly higher raw material costs for nitrile gloves in the near term, while natural rubber gloves could potentially benefit from lower NR Latex Concentrate prices.
Fuel costs on the other hand typically made up 15-25% of the total production cost for Malaysian glovemakers. As of 1 December 2023, global natural gas has plunged -37.3%ytd to USD 3.2/mmbtu. This suggests a possible lower natural gas tariff in Malaysia in 2024, mainly due to the typical 4-month gap between Malaysia Petroleum Management (MPM) and natural gas prices on the New York Mercantile Exchange (NYMEX). Note that the natural gas tariff in Malaysia is determined based on the natural gas price on NYMEX plus the currency exchange rate of USD/MYR, as well as other associated expenses (like transportation and administrative costs).
Meanwhile, given the positive correlation between natural gas prices and crude oil, the house foresees a rising trend in natural gas tariff, following its in-house Brent crude oil price forecast of USD84pb in 2024 (vs. USD83pb in 2023), which would increase the fuel cost and compress the margin.
MIDF maintains NEUTRAL on the sector and remains cautious about intense competition from Chinese players, which may exert upward pressure on pricing flexibility for all glovemakers under its coverage. On a positive note, the replenishment of inventory following the expiry of pandemic inventory is expected to boost demand for gloves.
This, combined with recent permanent and temporary closures of production facilities, could potentially improve production efficiency and reduce production costs per unit. As such, MIDF expects earnings to turn around albeit gradually. Top picks for the sector are Hartalega (NEUTRAL, TP: RM2.20) and Kossan Rubber Industries (NEUTRAL, TP: RM1.38). This is primarily based on their effective cost management and higher net cash position.
