Malaysian Glove Makers Facing Production Halts on Water Cuts

Apr 15, 2014 7:27 am ET

(Updates with palm oil, droughts from ninth paragraph.)

April 15 (Bloomberg) -- Top Glove Corp. and Supermax Corp., two of the world’s biggest rubber-glove manufacturers, said prolonged water rationing in Malaysia’s Selangor state will raise costs and disrupt production.

Top Glove said it will cost 10 times the normal rate to transport water to factories affected by the shortage, according to Chairman Lim Wee Chai in an e-mailed response to questions from Bloomberg News. The rationing is “worrisome and of great concern” to all glove makers, Supermax Group Managing Director Stanley Thai said by e-mail.

A drought in Malaysia that forced Selangor state to start rationing in February is taking its toll on manufacturers also grappling with higher electricity prices and fuel costs. Both companies said the industry already faces lower profit margins amid an oversupply of gloves that will worsen in the second half.

“Should this continue, there may be forced downtime for our production lines,” Lim said.

Supermax fell 1.2 percent in Kuala Lumpur, the lowest close since March 24. The stock has dropped 10 percent this year compared with a 0.7 percent loss for the FTSE Bursa Malaysia KLCI Index.

Top Glove was unchanged. The shares slid 2.1 percent yesterday after Lim told Bloomberg News that profit margins may keep falling.

On Hold

A total of 821 project applications were put on hold as of the end of March in Selangor, Kuala Lumpur and Putrajaya due to the shortage, the state’s chief minister Khalid Ibrahim said this month. Khalid couldn’t be immediately reached for comment at his office.

Industries in Selangor will be hit by surging costs should they face water shortages as they would need to source for alternative supplies, Saw Choo Boon, president of the Federation of Malaysian Manufacturers, was cited as saying in the Star newspaper today. An electrical products company had to forgo a 40 million-ringgit ($12 million) order due to uncertainty over water supplies, the paper said.

Water shortages amid a drop-off in rains from mid-January to mid-March has also raised the risk to palm oil production, potentially affecting Malaysia, Indonesia and elsewhere in Southeast Asia. Malaysia and Indonesia account for 86 percent of global output of the oil. A warming of the tropical Pacific has increased the likelihood of the onset of El Nino as well.

Areas around Malaysia’s capital Kuala Lumpur started water rationing in February while neighboring Singapore had a record 27-day stretch without rain from Jan. 13. Elsewhere, countries from Australia to Brazil, Kosovo and parts of Thailand and the U.S. are similarly battling drought.

Water Sources

Factories where water sources are connected from residential pipelines are affected, Supermax’s Thai said. Glove makers can’t operate with the current scheduled rationing of two days of supply and two days without, he said.

Supermax has six of nine factories operating in Selangor, with one factory affected by the shortage, he said.

“The water rationing is worrying not just for businesses but also consumers,” Ang Kok Heng, who helps manage $428 million as chief investment officer at Phillip Capital Management Sdn. in Kuala Lumpur, said in a phone interview. “The main concern would still be the increase in capacity from next year onwards. All fund managers have expressed concerns on this. We have some gloves stocks and are still holding.”

--With assistance from Randall Hackley in London and Ranjeetha Pakiam in Kuala Lumpur.