Maintain positive: Year-to-date (until June 25, 2014) the price of West Texas Intermediate (WTI) crude oil has risen by 8.4%. Historically, the prices of crude oil, nitrile and latex are closely correlated. However, since 2012, there has been an apparent oversupply of nitrile and latex (thus applying downward price pressure on nitrile and latex) which resulted in a stark divergence in its price trend vis-à-vis crude oil.
Nonetheless, since nitrile is derived from acrylonitrile, butadiene, as well as various chemicals (almost all of which are petroleum derivatives), the industry leaders are expecting nitrile prices to eventually increase in accordance with the rise in crude oil prices.
As such, we believe that a further rise in crude oil prices could possibly increase the price of nitrile.
According to MyPower Corporation’s management, there might be a possible hike in electricity tariffs as the price of liquefied natural gas (LNG) increased by 10% to 25% between January and June 2014. The power tariff hike is aimed at closing the gap between the true cost of generating power (42 sen per kWh) and the current subsidised tariff (38.53 sen per kWh).
To mitigate the imminent rise in electricity costs, several glove manufacturers have resorted to using co-generators, which cost around RM25 million to RM30 million and have a payback period of about three to four years.
The goods and services tax, to be implemented in April 2015, will have a minimal impact on glove sales by local glove manufacturers. This is due to the very low domestic market share in proportion to exports.
For example, Hartalega Holdings Bhd’s management has indicated that sales from the Malaysian market only make up about 1% of the company’s total sales. This is because most major local glove manufacturers export their products overseas (mostly to Europe and the US).
We are reiterating our “positive” stance on the glove sector. We expect raw material prices to increase slightly soon with the rise in crude oil prices. Hence, this is an opportune time for glove manufacturers to stock up on cheap raw materials and later increase their average selling prices.
Although the plausible increase in electricity tariffs might cause dents in profit margins, glove manufacturers have been taking proactive measures to lessen the impact via alternative power generation methods.
Also note that industrial gas users sign reservation charge contracts with gas suppliers which lock in the cost of gas. As such, we are still sanguine on the local glove industry and are maintaining our “buy” calls on Top Glove Corp Bhd and Kossan Rubber Industries Bhd at a target price (TP) of RM5.70 and RM5.23 respectively, and “trading buy” call on Hartalega with a TP of RM7.10. — MIDF Research, June 26
This article first appeared in The Edge Financial Daily, on June 27, 2014.