Caution! Higher U.S. Import Tariffs On Chinese Medical Gloves In 2026 Expected

U.S. import tariffs on Chinese medical gloves to increase from  7.5% to 25% in 2026. On 14 May 2024, the White House announced  that import tariffs on rubber medical and surgical gloves from China will  increase from 7.5% to 25% in 2026. This aims to bolster the domestic  medical supply industry and enable American businesses to compete with  low-priced Chinese imports.

MIDF Research said today (May 15) thi was not new, but merely removal of temporary exemption and  introduction of higher import tariff on Chinese medical gloves.

Recall that the US initially imposed a 15% tariff on medical gloves made  in China effective 1 September 2019, during President Trump’s term.

This import tariff was then reduced to 7.5% as part of the Phase 1 US-China  trade agreement in February 2019. Amid the COVID-19 outbreak in 2020,  a temporary tariff exemption was granted for import of Chinese medical  gloves.

The exemption was extended several times, with the latest  extension valid until 31 May 2024 and further extensions will be subject  to a statutory four-year review.

Potential cost pass-through from higher import tariffs; likely  sourcing shift from Chinese glovemakers.

The current ASP ga  between Malaysian and Chinese glovemakers is USD 1-2 per 1,000 pieces,  with the blended ASP for Malaysian glovemakers at USD19 per 1,000  pieces. MIDF anticipates that the higher imposition of import tariffs on  Chinese medical gloves will increase the cost per 1,000 pieces. 

Consequently, Chinese glovemakers are likely to pass these costs onto  customers through price adjustments. This could potentially narrow the  ASP gap or result in Chinese glovemakers charging higher ASPs compared  to Malaysian/Thai counterparts.

Given the ample production capacity  among existing players, MIDF’s view is that US medical glove importers are likely  to shift their sourcing from Chinese to other glovemakers before the tariff  imposition in 2026.

Malaysian glovemakers could be on the table, known for high-quality products. Based on the Malaysian Rubber  Council, rubber gloves accounted for 70.8% of rubber product exports as of 1QCY24, with the USA being the largest  consumer (contributing 32% of total exports).

Among these glovemakers, Hartalega boasts a strong track record of supplying  gloves to the US (accounting for 50-56% of total sales). While export sales to US previously dominated Top Glove revenue  with a pre-pandemic contribution of 31-42% but dropped to the 25% range in 2021 following US CBP import bans (amidst alleged exploitative labor practices).

Despite the lifting of the ban, oversupply conditions have pressured Top Glove’s US  revenue to remain in the 25% range of total revenue.

MIDF views Malaysian glovemakers’ established market presence and  reputation for high-quality products in the US are well-positioned to secure sales orders if US hospitals pivot away from  Chinese suppliers.

However, MIDF does not rule out the possibility that imports of medical gloves from other countries may be  the next target, considering the initiatives to support the domestic medical supply industry.

Uncertainty looms over the outcome of the upcoming US Presidential election. MIDF suggests a prudent ‘wait and  see’ approach to the announcement as the US approaches its 60th Presidential election on 5 November 2024. This is given that the presumptive nominees include the incumbent US President Joe Biden (official presidential nomination of the  Democratic party expected in August 2024) and ex-US President Donald Trump (official presidential nomination of the  Republican party expected in July 2024).

With no clear winner yet and the possibility of higher import tariffs not materializing  until 2026, MIDF will approach the situation cautiously.

Nevertheless, considering that the 15% import tariffs imposed during  Donald Trump’s presidency were negotiated down to 7.5% during the Phase 1 US-China trade agreement in February 2019,  we do not rule out the possibility of changes in the rate.

Export sales volume for rubber gloves picked up in 1Q24, but only marginal improvement in ASP. DOSM reported  that the export value of rubber gloves increased in 1QCY24 to RM15.1b (+399%yoy, +27.5%qoq).

This increase was  primarily due to the greater export sales volume of rubber gloves, which reached 626.2k mt (+382.4%yoy, +26%qoq),  thanks to buyer replenishment activity following the expiration of pandemic inventory.

The average price of rubber gloves in  Malaysia remained relatively flat (+1.3%yoy, +1.1%qoq) during the quarter. This could indicate that despite the increase in  demand, the ASP remained under pressure due to intense competition from Chinese glovemakers and ample production  capacity from existing glovemakers.

This trend aligns with MIDF’s earnings forecast for both Hartalega (NEUTRAL, TP:  RM2.45) and Kossan Rubber (SELL, TP: RM1.35), which are likely to have publish higher sales volume in 1QCY24, but  the ASP is expected to remain flat.

MIDF reiterates NEUTRAL stance on the sector

MIDF makes no changes to their companies’ earnings forecast or recommendations, and keep their sectoral calls unchanged pending further clarification, especially since Kossan and Hartalega  are scheduled to release its results this month.

Looking ahead, MIDF remains cautious as intense competition is expected to  continue exerting upward pressure on pricing for all glovemakers within their coverage.

On the positive side, the replenishment of inventory following the expiration of pandemic stockpiles is anticipated to bolster glove demand and improve sales.

The recent permanent and temporary closures of some production facilities could enhance production efficiency and decrease  production costs per unit.

In short, MIDF maintains a NEUTRAL call on the glove sector. At present, MIDF does not have a top pick, as  all glovemakers within their coverage are predominantly rated NEUTRAL or SELL.

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