Flipside of ringgit’s strength

Petaling Jaya: While the recent sharp appreciation of the ringgit against a basket of other currencies has improved the mood of the Malaysian public, analysts caution that the movement of the local currency is a two-edged sword for businesses over the immediate term.

As of noon Nov 21, the ringgit had strengthened by 7.3% against the US dollar year-to-date, but with Malaysia being an export nation, concerns have arisen over companies and industries, such as rubber gloves and semiconductor, whose focus is on external markets.

That said, established names in the gloves industry have moved quickly to soothe the concerns of investors and consumers over the ringgit’s strength, adopting a philosophical attitude toward foreign exchange (forex) movements.

For example, Top Glove Corp Bhd, the world’s largest rubber-glove manufacturer, told StarBiz that any impact from the strengthening or weakening of the ringgit will be short term, although it conceded that it does affect all glove exporters, as the industry trades in US dollars.

However, the group said the impact is mitigated by a number of elements, including the fact that 50% to 60% of Top Glove’s input costs, especially raw materials, is also denominated in the greenback.

“This means there is some natural hedging, and we are consistently hedging the US dollar forward,” the group added.

Forward hedging is a risk management strategy that uses forward contracts to protect against adverse changes in prices, interest rates, or most commonly currency exchange rates.

A forward contract is a customisable agreement between two parties to buy or sell an asset, such as a currency, at a predetermined price on a specific future date, which in turn provides certainty but binding the parties to the terms.

Top Glove said it plans its supply chain and sourcing based on product quality and pricing, and does not make drastic changes solely due to currency fluctuations.

“History has shown that currency fluctuations can be temporary, as over the course of our business we have experienced the exchange rate at RM2.50 to US$1, to as high as RM4.80 to US$1, and we believe businesses will adjust their pricing accordingly,” the group said.

Top Glove is also confident that the ringgit’s movements will not pose long-term risks to its competitiveness, based on the fact that medical gloves are a necessary product in the healthcare industry, and the price of gloves is relatively small in relation to total medical costs.

Despite emphasising that forex movements are temporary and stem from external factors not within its control, the group, which commands roughly a quarter of the world’s market for rubber gloves by some estimates, said its approach has been to focus on internal factors that are more within its control.

“We deploy our resources towards improving our quality and cost efficiency through research and development, innovation and digitalisation,” Top Glove said.

An industry observer said he believes Hartalega Holdings Bhd, another glove titan, should be operating under a similar situation.

Hesaid many of Malaysia’s glove producers, including Top Glove and Hartalega, have been around for several decades and such currency volatility should not present serious operational threats to their bottomlines.