KUALA LUMPUR: The supernormal earnings of the rubber products sector are on their final legs as the anticipated normalisation pace has begun for the sector.

       With the moderation in the average selling prices (ASPs) of rubber gloves, RHB Research is keeping a “neutral” call on the sector.

       The share prices of rubber product players have significantly declined recently as the market adjusts for the fall in the ASPs, the research house said in its latest report.

       “But we believe these factors have largely been accounted for, with domestic institutions heavily reducing their exposure for the past few months.

       “That said, we have yet to see value or catalysts to re-rate the sector, and the balance of risks still remain tilted towards the downside,” it added.

       The selling prices of rubber gloves have also fallen from its highs, with the current ASPs of nitrile and latex gloves ranging from US$40 to US$45 (RM167.54 to RM188.48) per 1,000 pieces and US$30 to US$35 (RM125.65 to RM146.60) respectively.

       Although manufacturers expect prices to fall 8% to 10% month-on-month onwards, RHB Research expects such a linear decrease may be unlikely.

       “In response, we trim our normalised price assumption per 1,000 pieces to US$27 (RM113.09) for nitrile and US$21 (RM87.96) for latex.

       “Our ASP assumptions are based on the expectation that prices will revert back to the cost-plus basis,” it said.

       RHB Research also noted that local manufacturers may incur market share loss should non-Malaysian manufacturers proceed with their aggressive expansion.

       With ASPs of rubber gloves on the declining trend, manufacturers could likely focus on clearing their high-cost inventory.

       “As such, prices could fall below our expectations and pose a margin compression risk to our forecast.

       “In the event where a steeper price war results in prices falling to cost-efficient levels, we believe this could prompt a further sector de-rating,” said RHB Research

       Besides that, it added that listed glove manufacturers under its coverage are expected to increase their production capacity to 326 billion pieces per annum by 2023.

       The research house findings revealed that an oversupply scenario is unlikely to happen for the next two years but “dynamics may be close to parity in 2023”.

       “As such, should the sector capacity expansion be realised beyond our projected figures or demand increases to below 12% of our forecast period, this could tilt the sector into an oversupply situation,” it added.