Thursday, August 9, 2012

Rubber gloves companies buying land: Just when you thought Top Glove is wrong

Some people were questioning the rationale for a rubber gloves company such as Top Glove into moving upstream - i.e. buying land for cultivation of rubber trees for the gloves. Kossan is now doing the same - and getting some flaks from CIMB.

I would presume because of the volatility of commodity prices, it is very difficult to predict what can happen in the future. What CIMB Research is saying is that these rubber gloves companies can hedge their future positions. Perhaps, we can learn from Airasia few years ago when they hedged their positions in fuel futures and the company had to write off hundreds of millions in derivatives losses. In hedging, it can go either way, as we do not know where prices of commodities are heading.

I am just wondering, wouldn't buying land and cultivating rubber trees itself is a form of hedging? - for the very long term in fact. (Perhaps, better than paying banks for hedging fees) I am suspecting that the reason why these companies are into cultivating their own rubber trees could be due to supplies as well besides the high volatility in prices. We sitting here sometimes may not know the difficulties or challenges companies get in terms of supplies. Remember, gloves is not the largest consumer of rubber. Perhaps tire is. Hence, these guys can't act like Nestle or Starbucks in capitalizing on their scale into cornering coffee supplies.

Let me give another example. When the Kuok group was owning a large chunk of sugar refinery and distribution in Malaysia, they had no problem getting supplies at fair price as they have large trading desks for supplies of these raw material for sugar. Now Felda is the largest supplier of processed sugar in Malaysia after buying these stakes from the Kuok's family - see what happened to prices of sugar over last few years.

Going back to rubber - The biggest question for these companies which are buying land is what can they do better with the cash reserves that they have. Branding, distribution, expansion OR buying land for cultivation? I guess the biggest question now is whether for gloves is there such importance in the need to have very strong brands in rubber gloves. Condoms - we have seen it in Durex! In gloves, probably Kimberly Clark is one of the strongest.

There may be in gloves as branding may bring confidence in the buyer's perspective of quality. When there is a strong brand, the pressure to pricing may be reduced. However, one thing I know is that condoms it is a B2C consumer business where branding is very very important - see Apple, Coke, Toyota, even Kimberly Clark's Kleenex or Kotex. B2B business such as rubber gloves where they are selling to healthcare companies, the need for branding is not that prevalent - important still but not that much.

Additionally, sitting here I am also wondering - if these companies start to create their very own strong brands, what happens to being OEM as that's what they do best now? Buyers may opt for other suppliers as they have started to compete directly against the likes of Kimberly-Clark, Ansell and several other brands. These are players who have very strong network at the healthcare space. Will this be a strategy where the companies are shooting themselves on their foot?

I guess there are many questions which we do not have the answers in terms of strategy where these rubber gloves players are going on their own to create the raw material supplies themselves. It may not be the wrong move judging from some of the examples in other industries that we have seen before.


khengsiong said...

We want condoms which we can trust, rather than the possibly unbranded one. Hence we choose Durex. But gloves are more like commodity, no?

BTW, what do you think of growth for glove market? Will we use more glove 1 year later than we do now?

Daichi Bo said...

Just imagine that instead of making glove, now they are planting glove. Stability of business is important if you are a serious investor to invest a lot and for long term, especially when you're the owner of the business this could assure you good sleep every night.

If I were controlling, I might be even thinking of building the factory inside or nearby the oil palm plantation, to share the power supply generated by the bio-gas or bio-fuel power plant supplying energy to oil mill because there is always excess of power supply which means that they could be really cheap.

John Tan said...

ur missing the main point.

The gloves makers are trying to create a synergy of runner plantation and gloves production

John Tan said...

the gloves makers are now trying to create a synergy between rubber plantation and gloves. its not about hedging.

felicity said...

Hi John

I hope there are synergy as well. However in the letter to shareholders from its management of Top Glove, they said

"In order to mitigate the volatility in latex costs in the future, we have started to work on acquiring suitable land locally as well as abroad for rubber plantation development."

I would think his ambition of mitigating volatility is an action to hedge those positions.