THE domestic rubber sector is expected to bounce back in 2020, as US buyers will likely increase Malaysian shipments following the tariff imposed on Chinese imported gloves.
The US government imposed a 15% tariff on medical gloves made in China, effective from Sept 1, 2019. This is in addition to the previous 25% duty imposed on China’s industrial gloves.
Affin Hwang Investment Bank Bhd (Affin Hwang Capital) upgraded the sector to ‘Overweight’ from ‘Neutral’ previously, as it projects things to turn around next year.
“We believe that 2020 would be a better year for glovemakers as they would likely benefit from stronger demand from the US after its imposition of a 15% tariff on Chinese imported gloves.
“As the concern in the third quarter of 2019 (3Q19) is being resolved, rubber glove manufacturers are poised for a better 2020.
“The improving prospects and a likely stronger earnings growth will help with rerating the sector,” the research house wrote in a recent note.
For the first nine months of the year (9M19), glovemakers’ earnings fell 12% year-on-year (YoY), coming in below both the consensus. Affin Hwang Capital estimated at around 66% of the respective forecasts.
“Apart from the increase in production cost due to higher utility charges arising from the natural gas price hike in July, the sector was also faced with labour shortage since the hard cap on overtime limited the total allowable overtime in a month to 104 hours only,” the research firm said.
As both were industry-wide issues, almost all glove producers recorded YoY profit declines for 9M19.
The research house also said it had underestimated the impact of a report relating to the issue of forced labour in the sector, which it believed caused a 15% to 25% shortage in manpower and posted the hard cap on the allowable overtime for employees.
“The government’s decision to freeze the recruitment of Bangladeshi workers, due to concern over bonds related to debt, had worsened the problem.
“Some companies have started recruiting from other countries or received approval to recruit directly to address the problem,” it said.
It expects the government to reintroduce the recruitment of Bangladeshi workers soon, after ironing out issues relating to recruitment agencies.
Manufacturers are also set to increase the consumer price of rubber-based products due to the gas price hike.
The July 5.3% hike in natural gas tariff was believed to have reduced gross profit margins between 0.5% and 0.8% in 3Q19.
“It was challenging for the manufacturers to raise prices with such a short notice as the lead time for orders was around 45 days.
“Given that the impact of the gas price hike was across the board, we believe the manufacturers have already started passing on the higher cost to customers,” Affin Hwang Capital said.
Top Glove Corp Bhd and Kossan Rubber Industries Bhd are Affin Hwang Capital’s ‘Buy’ picks for the sector.
