KUALA LUMPUR: A meaningful recovery in demand for rubber products is likely only in the second half of 2024 (2H24).
Sentiment on the sector improved recently following the sequential pick-up in sales volume during the November results season.
"We expect the recovery in demand to remain choppy, and a meaningful difference is likely to be seen only in 2H24," RHb research said in its note today.
Nevertheless, the firm expects the gradual improvement in market dynamics to offer respite for the local glove manufacturers.
Key downside risks include weaker-than-expected demand, dragged by excessive supply capacity, and higher-than-expected operating costs.
"We maintain neutral on the sector with top picks including Hartalega Holdings Bhd and Kossan Rubber Group Bhd (KRI)."Our sector weighting is due to the expectation of normalising costs, production line rationalisation exercises, and the expectation that customer inventory could normalise by 2H24," RHB research said.
It is expecting industry supply to contract by 50.7 billion pieces year on year (YoY) in 2023.
RHB research said this should be offset by 3 billion newly added capacity from China glove maker Intco Medical and a 7.3 billion planned capacity expansion from Thailand.
"Our 2023 industry annual supply assumption is now 373 billion pieces.
"We expect near-term demand to remain erratic as customers are not rushing to commit to making bulk purchases, in view of the ample supply capacity available."That said, any attempt to raise prices remains challenging as customers are still price-sensitive," it said in a note.
Nevertheless, RHB research said the gradual improvement in market dynamics should offer a respite for the local glove manufacturers.
It said the consistency of order replenishment, ability to implement cost-pass-throughs, and the gradual improvement in industry utilisation rates should be key re-rating catalysts for the near term.