12/23/2010

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MALAYSIA: World's largest rubber glove manufacturer's margins impacted by higher latex prices

The world's largest rubber glove manufacturer, Top Glove Corp Bhd, saw margins take a hit as continued higher latex prices and a weak US dollar impacted the company's net profit for the first quarter of the company's financial year that ended 30 Nov. 2010.Compared with a year ago, net profit fell 44.71% to RM36.05 million on revenue that was only marginally higher at RM491.5 million as average latex prices rose by 57% to RM7.20 per kg year-on-year while the greenback weakened against the ringgit by 9.3% to 3.11.Top Glove chairman Tan Sri Lim Wee-Chai had in a briefing for analysts and the media in early October said it was more difficult to pass the higher costs to customers due to lower demand for gloves (which stood at 150 billion pieces for the year) compared with during the height of the H1N1 pandemic.He had also noted the time lag in passing down the costs to customers on account of the volatility in latex prices and currency fluctuations.Lim said in a statement on 15 Dec. 2010 that customers had kept their inventory levels at a minimum due to the high selling prices of the gloves besides the normalising demand coupled with the excess capacity situation.Lim said the company would continue to share some of these higher costs with customers even though there would be a time lag for the cost to be passed down.He added that the company was also dedicating more lines to produce nitrile gloves, which commanded better margins and were not subjected to the volatility in latex prices.The first quarter just ended proved to be a challenging one for Top Glove. "Although volatility in commodity prices, in particular latex prices, and the weakening US dollar will continue to impact the industry, we're optimistic that Top Glove will sustain its profitability, " Lim said.Analysts told local media that it was still unclear how earnings would pan out for the rest of the company's financial year due to the challenges.Contrary to Lim's and the industry's expectations of a downcycle in latex prices soon, analysts felt that prices were still trending upwards.OSK Research Sdn Bhd analyst Jason Yap said there was no reason to see stronger demand going forward as the global economy was still recovering from the recession.There're also no big catalysts such as the H1N1 pandemic and the additional capacity (from the manufacturers) does not help as when customers see that there is more supply coming in, they tend to wait on stocking up especially due to the higher prices, he added.An analyst with a local investment bank said it was still fairly difficult to tell when latex prices would come down since commodity prices in general were on an uptrend.The prices will come down if there's extra supply otherwise for Top Glove and other rubber glove suppliers, their earnings visibility will very much depend on demand and whether they can pass on the costs, she said.She added that even with an inventory upcycle, which happens in the first-half of the year for the industry, demand would still be be lower than during the height of the H1N1 pandemic.An analyst with a foreign brokerage said earnings visibility was still low with no indications on how demand would look like even in the second quarter. She said latex price movements would not be dictated by demand from the glove sector but by the auto industry, which was the main consumer due to tyres.(Syed Rashid Ali, Karachi, Pakistan)

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