KUALA LUMPUR: Glove makers’ earnings are likely to decline in the third quarter (Q3) weighed down by average selling price (ASP) normalisation in Q2 and higher natural gas tariffs, said CIMB Securities Sdn Bhd.
The firm noted that ASP dropped to about US$22 per 1,000 pieces from between US$25 and US$28 per 1,000 pieces during the June quarter.
“Beyond Q3, we foresee further margin compression risk as the higher natural gas tariff of RM59/MMBtu takes effect, compared with the September quarter average of RM49.9/MMBtu.
“Natural gas typically accounts for 10–15 per cent of total glove production costs,” said the firm.
CIMB Securities anticipates a potential increase in ASP by US$1/1,000 pieces driven by the recent surge in key input costs. This would bring the effective ASP to US$23.
“While this could support a modest improvement in Q4 earnings, we believe glove manufacturers are unlikely to replicate the peak core earnings achieved in the June quarter, as ASPs have normalised significantly from peak levels of approximately US$28/1,000 pieces in June,” it said.
Additionally, implementing the minimum wage increase to RM2,000 from RM1,700, effective June 2027 is expected to negatively impact glove manufacturers’ margins owing to the industry’s labour-intensive nature and its continued reliance on a sizable blue-collar workforce.
Based on the firm’s estimates, the increase in minimum wages could reduce earnings in the financial year 2027 (FY27) and FY28 by about four per cent and seven per cent respectively.
“We expect the global glove industry to remain oversupplied at least until 2027, driven by newly commissioned facilities across Southeast Asia that are estimated to add between 10 and 15 billion pieces of annual capacity in 2026.
“We estimate global glove demand growth of about three per cent in 2026, taking into account the weak US import data,” it said.
Global glove demand growth is then expected to accelerate to 10 per cent in 2027 and seven per cent in 2028, broadly in line with the pre–Covid-19 five-year historical average of between 10 per cent and 12 per cent.
“With industry capacity expansion likely to outpace demand growth, we expect glove manufacturers under our coverage to face ongoing pricing pressure amid a still-unfavourable supply-demand environment,” it said.
The firm maintained its “Neutral” call on the sector, given that persistent demand-supply imbalance and rising cost pressures could continue to weigh on margins.
The sector is currently trading at 0.9 times price-to-book ratio, near the valuation peak reached in May when ASPs were at their highest.
The firm remains Kossan Rubber Industries Bhd as its sector pick, supported by its relatively higher exposure to non-generic products and a strong net cash position equivalent to 49 per cent of its market capitalisation.