This article first appeared in The Edge Malaysia Weekly on May 20, 2024 - May 26, 2024

IN a move to counter what the White House deems unfair trade practices by China, the US has announced a slew of tariff increases that will affect US$18 billion of Chinese imports, ranging from semiconductors and rubber to surgical gloves.

Not surprisingly, the share price of the Big Four glove manufacturers listed on Bursa Malaysia surged in the middle of last week after it was announced that tariff rates on rubber medical and surgical gloves from China would increase to 25% from 7.5% from 2026.

In a single trading day (May 15), Top Glove Corp Bhd (KL:TOPGLOV) gained 31.25% to close at RM1.26. Hartalega Holdings Bhd (KL:HARTA) rose 29.05% on the same day to close at RM3.82 while Supermax Corp Bhd (KL:SUPERMX) gained 24.86% to settle at RM1.08. Kossan Rubber Industries Bhd (KL:KOSSAN) moved up 15.13% to end the day at RM2.74.

However, the rally in the prices was not sustained as the glove counters surrendered the gains made on the next trading day. The biggest retreat was seen in Kossan, whose share price fell 9.5% to close at RM2.48 on May 16; the least affected was Hartalega, whose share price slipped 4.45% to end at RM3.65. Top Glove shed 5%, closing at RM1.20 while Supermax declined 6.4% to close at RM1.01.

While some investors are likely agonising over their knee-jerk purchase of the stocks, fund managers and analysts are divided on the news of the tariff rise.

But there is one thing everyone seems to agree on — that the new tariff would somewhat level the playing field between the Chinese and Malaysian glove manufacturers.

Analysts estimate that the tariff of 25% could increase Chinese glove makers’ average selling price (ASP) by at least US$3 per 1,000 pieces, narrowing the ASP gap between the Malaysian and Chinese manufacturers.

According to Kenanga Research, the current gap is between US$1 and US$2 per 1,000 pieces, with Malaysian gloves priced at an average US$19 per 1,000 pieces.

However, there are those who urge vigilance, with one main concern being how the Chinese glove manufacturers would react since 2026 is still some time away.

“Given that the tariff rise will only be effective in 2026, there could be uncertainty about how industry dynamics will develop. As there is more than a year for Chinese glove producers to respond, they could flood the market with their cheap gloves before the tariff kicks in. This could drive down the ASP,” says Fortress Capital Asset Management (M) Sdn Bhd CEO Datuk Thomas Yong.

At the present time, the glove industry is still struggling with oversupply and relatively flat ASP, although it is seeing nascent signs of recovery with re-orders picking up again.

This, says MIDF Research in a report, is an indication of the intense competition from Chinese glove makers and ample production capacity that continues to exist in the industry.

CGS International, in a May 15 report, points out that the blended utilisation rate across the four biggest glove players in the country stands at 55%, which would put total idle capacity at some 65 billion pieces per year.

Many hold the opinion that the market will reach an equilibrium towards the end of the year or in early 2025. By then, investors can expect to see an improvement in earnings, says Rakuten Trade Sdn Bhd equity research vice-president Thong Pak Leng.

While there is a possibility of Malaysian glove makers taking market share from Chinese players in the US — as the tariff increase would put Malaysian glove prices on a par with Chinese prices — the latter could look to other markets in the world for a foothold, analysts say.

“We doubt that there is substantial upside to the earnings before interest and tax per 1,000 pieces from our forecasts,” says CGS International, referring to the fact that Chinese players could channel their products to other key markets at competitive prices. The research house has an “underweight” call on the sector.

Hong Leong Investment Bank Research (HLIB Research), which is neutral on the sector, shares the sentiment, commenting that Chinese players will start to gradually increase their presence in European and Asian markets to reduce US orders.

Will this result in a loss of market share for Malaysian glove makers in those markets?

If all things stay constant, with capacity expanding as forecast, in theory, it would just be a round of musical chairs, where Chinese manufacturers may rotate to different markets, leaving room for Malaysian manufacturers to fill the gaps.

However, the US is also working on building its own glove making industry. It has been reported that since the pandemic, the US federal government has pumped about US$1.5 billion into increasing the country’s production of medical masks, gowns and gloves.

“We should not forget that the US also has its domestic production,” the Malaysian Rubber Glove Manufacturers Association (Margma) points out in a May 15 press release.

MIDF Research, which is neutral on the sector, says while Malaysian glove manufacturers with established market presence and a reputation for high-quality products in the US stand a good chance of securing orders should US hospitals switch to Malaysian-made gloves, the research house does not rule out the possibility that medical gloves imported from other countries may be the next target — considering the US government’s initiative to support the domestic medical supply industry.

Nevertheless, people in the industry say US-made gloves are currently still way behind the curve in terms of technology and cost structure compared to gloves made in countries like Malaysia, Thailand and China.

“Bearing in mind that the actual take-off by the proposed manufacturing entities in the US is far from the initial targets, and that the consumption rate for gloves are also expected to increase at about 6%-8% per annum; so the market growth may be large enough to absorb the small amount of US local production. Therefore, we believe the risk (of Malaysian manufacturers losing out to US glove manufacturers) could be low given that the cost to produce gloves in the US is far higher than in Malaysia,” says Margma president Oon Kim Hung in a reply to The Edge. 

He adds that rubber glove exports to the US market makes up about 35% of Malaysia’s rubber glove exports, contributing about RM4 billion in 2023.

Another wild card that could impact the outlook for the global industry is the highly contested US presidential election in November. Former president Donald Trump, who is contesting against President Joe Biden, saw tensions escalate between the US and China when he was at the helm.

“Heightened US-China tensions in election years have become a new norm. It is likely that both parties would continue to impose or promise to impose additional sanctions or tariffs on China to a certain extent. However, looking at recent history, the Trump administration certainly introduced more hair-raising uncertainty,” says Fortress Capital’s Yong.

That said, does it mean it is premature to buy glove shares?

For those investing for the long term, it likely is a good time to accumulate glove stocks, says Areca Capital Sdn Bhd CEO Danny Wong  The caveat is that investors have to look for companies that are fundamentally strong. “It is a good time to accumulate stocks in companies that have a huge cash pile that can withstand another period of low orders.”

He is convinced that demand for gloves is recovering, with or without the tariff increase. “Customers are reordering gloves as stocks have depleted. The ASP is also catching up, which means China will not have to engage in a price war. Thirdly, glove makers have undergone cost rationalisation, so they are more efficient now. And since there is currently under-utilisation of production, the margins can be higher for additional demand that comes in.”

RHB Research, which has maintained its “overweight” call on the sector, believes there could potentially be a 7% accretion to Malaysian manufacturers’ revenue, based on the assumption of China losing half its export volume to the US. This means China gloves, which now make up 40% of US glove imports, could halve to 20%.

“The flow-through impact on the bottom line could be significant — depending on the industry dynamics and cost structure by 2026. All else being equal, we continue to maintain our ‘overweight’ view on Malaysia’s glove sector, underpinned by more balanced demand supply dynamics by 2HFY2024, a recovery in the cost-plus mechanism and pick-up in order volume,” it says.

Of the Big Four glove counters, Hartalega and Kossan have the biggest exposure in the US, accounting for about 50% and 40% of their revenue respectively. Analysts say these two counters stand to benefit the most from the tariff rate rise.

“Hartalega and Kossan have relatively higher exposure in North America compared with Top Glove and Supermax. Also, Hartalega and Kossan have not been served withhold release orders (WRO) by the US Customs and Border Protection. Furthermore, Hartalega and Kossan had the lowest cost structure among the Big Four in 3QCY2023, allowing them to offer more competitive pricing,” says HLIB Research, explaining that it had used 3QCY2023 to analyse cost structure and profitability after taking into account that 4QCY2023 may not be reflective due to the impact of the Red Sea crisis. 

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