Glove makers fall on higher gas price

Glove manufacturers will likely be able to pass on the higher costs to clients in September, according to MIDF

by SULHI KHALID / pic by MUHD AMIN NAHARUL

LISTED glove manufacturers are expected to experience minimal impact from the recent gas price hike by Gas Malaysia Bhd as the companies have a cost pass-through mechanism with their customers, said analysts.

Glove makers like Top Glove Corp Bhd declined five sen to RM4.68, while Hartalega Holdings Bhd fell seven sen to RM5.15 and Kossan Rubber Industries Bhd dropped two sen to RM3.98.

Supermax Corp Bhd also dipped two sen to RM1.61 yesterday, on the increase in the average natural gas price of 5.37% or RM1.74 to RM34.12 per million British thermal unit for the non-power sector yesterday.

“On average, natural gas makes up circa 10%-15% of total operating costs. Raw materials like latex and nitrile still make up the majority of total costs at circa 45%,” AmInvestment Bank Bhd equity research analyst Nafisah Azmi said.

Glove makers will likely be able to pass on the higher costs to clients in September, and in the meantime, the financial impact is forecasted to eat up to 5% of earnings in the third quarter, MIDF Research said in a research note yesterday.

Following the news, Gas Malaysia rose two sen to RM2.93 per share yesterday, valuing the company at RM3.77 billion.

The natural gas price, like the electricity tariff, is reviewed by the government every six months.

The main concern of glove makers — as far as analysts are concerned — is the market pressure on pricing, due to rising production capacity, which is eating into margins.

“To keep operating costs at bay, glove manufacturers are actively looking at ways to reduce the escalating cost of energy and labour by improving plant efficiency with automation,” an analyst at MIDF said.

He prefers mid-sized glove makers like Kossan and Supermax as they are catching up in terms of capacity and improving plant efficiency to bigger manufacturers like Top Glove.

The analyst has a ‘Buy’ call on Supermax with a target price of RM2.07 and Kossan with a target price of RM4.53, and maintains a neutral stance on the sector.

Top Glove and Hartalega are components of the benchmark FTSE Bursa Malaysia KLCI.

Top Glove’s share price has come under pressure from the market on expectations that the counter may be removed from the index in the next review as other stocks are more valuable in terms of market capitalisation.

Meanwhile, the natural gas tariff hike came as a surprise to its major consumers.

Malaysian Rubber Glove Manufacturers Association (Margma) president Denis Low Jau Foo said the rise will result in an unanticipated cost increase in order to honour the estimated RM5 billion orders taken prior to the announcement.

According to Margma, Malaysia will stand to lose an estimated RM47.2 million in foreign revenue from this sudden gas tariff increase over the next three months.

Margma estimates the price hike will lead to an increase in production cost of US$0.30 (RM1.23) to US$0.80 per 1,000 pieces of nitrile gloves and about US$0.35 to US$0.85 for latex gloves.

The non-profit industry association warned of a potential chain effect in glove prices following the announcement on the gas price hike, and it advises its members to inform their customers immediately about this sudden increase in natural gas tariff which impacts production costs substantially.

“It does not benefit the nation and for the next two to three months ahead, it is the buyers that are gaining on what could have been extra revenue for the nation,” Low said in a statement on Sunday.

The association also criticised the lack of clarity by the Energy Commission (EC) in monitoring the energy sector.

“The EC is shoving the new Third Party Access (TPA) policy down the throats of natural gas users and Gas Malaysia.

“It is absurd that while the new policy is not properly explained, industry players are expected to sign new gas supply agreements without even being given a complete agreement for their review by Sept 30, 2019,” Low added.

The TPA will allow third parties to access gas facilities that they do not own or operate.

To date, there are three types of gas facilities that fall under the scope of the TPA system — namely the regasification terminals, transmission pipelines and distribution pipelines.