The current supply is insufficient to meet the demand due to the severity of the Covid-19 pandemic

by SHAZNI ONG / pic credit: youtube.com

HARTALEGA Holdings Bhd believes the structural change in usage will ensure there will be no glut of gloves in the market in the next three to four years despite many manufacturers ramping up production capacity and new entrants proposing to venture into this sector driven by the market opportunity created by the Covid-19 pandemic.

Hartalega’s executive chairman Kuan Kam Hon @ Kwan Kam Onn said there’s a big shortage in glove production capacity at present as the demand for gloves worldwide is still not met due to the severity of the Covid-19 pandemic.

“I think for us, our estimation for the next three years, the supply won’t be able to meet the demand. Even on the fourth (year), because right now there’s an enormous shortage,” he told reporters at the company’s 14th AGM in Petaling Jaya on Tuesday.

Kam Hon noted that the supply and demand balance for gloves is always short, describing it as “the system is compromising”.

“We don’t even know whether you’ll have 120 billion pieces more in the next three years. Will it be sufficient? I do not think it is sufficient.

“Even in the fourth year, (if) you have extra, it only goes into inventory building. When you always have shortages in supplies, you are not able to build inventory,” he said.

Commenting on the growing number of new entrants into the market to cater to the spiked demand, he said glove dipping is a long technical process.

“Expansion, the transition period is at least three years. A lot of claims out there are saying within one year, we can have this amount of production capacity.

“Just look at us, we are constantly expanding and what is our growth per annum? Maybe 20%, slightly more than the organic growth. To us, it is a big challenge because it is concerning our capacity, what we produce.

“As it stands from January until now, we’ve gone through three quarters of the year, and still the shortage in the market is so drastic, prices continue to grow,” he said.

Hartalega CEO Kuan Mun Leong concurred, adding that the pandemic has resulted in the change of user behaviour with demand in developed countries increasing by 30%, whereas in developing countries, where the gloves per capita consumption used to be very low, the usage/demand has more than doubled.

“If we total the two numbers together, the change of user behaviour has resulted in a structural step-up in demand, the usage of gloves, through heightened hygiene and safety awareness,” he said.

Mun Leong foresees no issue in oversupply with demand for gloves in the near to mid term set to remain very strong.

“The notion of oversupply, we don’t see in the next three to four years,” he said.

Mun Leong noted that Hartalega remains committed to ramping up its expansion plans to meet heightened global demand for nitrile gloves due to the rising Covid-19 infection levels across the world.

To cater to this demand growth, as well as taking a longer-term perspective towards the structural step-up in demand, Hartalega is accelerating capacity expansion via their Next Generation Integrated Glove Manufacturing Complex (NGC) in Sepang.

To date, the company has commissioned 10 out of 12 production lines for its Plant 6 at the complex, while for Plant 7, the first production line is on track for completion by October 2020, Mun Leong said.

On top of this, the company is scaling up its expansion plans with the acquisition of land adjacent to Plant 7 of the NGC.

“Totalling 60.57 acres (24.51 ha) and with all the necessary infrastructures readily available, we will construct four additional plants, namely Plants 8 to 11, which will progress expeditiously, adding installed capacity of another 19 billion pieces per annum once completed,” he said.

Mun Leong said Hartalega’s long-term capacity growth would be propelled by its next expansion phase — the NGC 2.0.

“We aim to commission the first production line of NGC 2.0 in the first half of 2022. Once fully completed by 2027, these expansion plans will see the group’s total annual installed capacity increase to 95 billion pieces per annum,” he said.

Hartalega shares gained RM1.10 or 8.46% to RM14.10 on Tuesday, valuing the company at RM48.33 billion and making it the fifth most valuable company on Bursa Malaysia behind the likes of Malayan Banking Bhd (RM84.4 billion), Top Glove Corp Bhd (RM68.6 billion), Public Bank Bhd (RM64.8 billion) and Tenaga Nasional Bhd (RM62.6 billion).

The news of Russia “Sputnik V” vaccine and other vaccines under test saw rubber glovemakers on Bursa Malaysia losing some RM55 billion in market capitalisation for the past month before fresh buying last Friday and this week saw them recoup much of the loss in value.

Share buybacks by companies like Hartalega and Top Glove also helped the share price recover recent losses.

For context as of Aug 11 when Russia announced the approval of its “Sputnik V” vaccine candidate, the share price of Top Glove was at RM9.10 (pre-bonus shares), Hartalega at RM18.30, Supermax Corp Bhd at RM10.83 (pre-bonus shares) and Kossan Rubber Industries Bhd at RM17.60.

During Thursday close last week, Top Glove fell to RM6.45 (closed at RM8.43 on Tuesday), Hartalega to RM11.88, Supermax to RM6.10 (now RM8.37) and Kossan at RM9.70 (now RM11.70).

The slump in share prices was attributed to panic selling by retailers as investors who bought in June/July locked in profits, JF Apex Securities Bhd research analyst How Chi Hoong told The Malaysian Reserve recently.

The execution of the bonus issues by Top Glove and Supermax also allowed retailers to take some money off the table.

He, however, believes the market has priced in the expectations of strong financial quarters ahead but expects volatility to persist as market participants, especially retailers, are pulling out money from the stock market to fulfil their financial commitments as the loan moratorium period ends this month.

Some research houses have also downgraded the glove sector outlook throughout the past month ahead of Top Glove’s quarterly result (today).

“We may need to wait for some fresh catalysts for the share prices of glovemakers to stabilise. The next catalysts on gloves will be whether the vaccines on trial can be developed successfully and whether the Covid-19 chain is broken and glove’s average selling price trend moving forward,” said an analyst at a local brokerage.