Increase in Supply for Latex

Based on 27^th July Star Biz (excerpts):

PETALING JAYA: Latex prices' downtrend will continue in the next few months due to improved supply and relatively stable demand, according to Top Glove Corp Bhd chairman Tan Sri Lim Wee Chai.

“My opinion is latex concentrate will fall to between RM5 and RM6 per kg in the next few months, from the price range of RM6 to RM6.30 per kg presently. Demand is stable. China's economy is not as aggressive as the past few years,” he told reporters at the inaugural media roundtable event about the rubber glove industry…

… “Depending on the global economic situation, the market grows about 5% to 15% each year,” he said.

Meanwhile, Kwee Shyan said the rubber glove manufacturing industry was ready to meet the challenges of the minimum wage policy, which would come into effect on Jan 1, 2013, as well as an expected removal of subsidies from natural gas prices…

… Kuang Sia said the Government should provide the industry with the time frame. “Three to five months is fine.”

However, Wee Chai urged the Government to consider any price changes carefully as “we do not want to cost ourselves out of the market.”

Kuan also pointed out that should such a cost increase occur, the rubber glove manufacturers could pass on the costs to the end-users.

Regarding the minimum wage policy, Kuan said the industry would continue to increase the use of automation in production.

“Hopefully, the glove industry will one day be a very automated industry,” he said.

Kuang Sia noted that in the late 1980s, the industry needed 20 workers to produce one million pieces of gloves per month. “Now, we need only four to five workers.”

However, Kuan said the challenge was to hire the human resources needed to operate and manage the increasingly sophisticated machines in the manufacturing plants

Based on the article, the demand for rubber glove will increase to 15%.  According to the Tan Sri Lim Wee Chai, chairman of Top Glove Corp Bhd, the latex prices will go down for the next few months. The downtrend of prices is due to the improvement in supply and relatively stable demand. He speculated that the latex price will be between RM5 and RM6 per kg for the next few months which the price now is around RM6 to RM6.30 per kg. The demand is stable. He also expected that the global demand for rubber gloves will grow to 15% this year. It also depends on the market grow which is about 5% to 15% each year. At the same time, Kwee Shyan mentioned that the rubber glove manufacturing industry will be ready to meet the challenges of minimum wage policy. The policy will start on Jan 1, 2013 with the removal of subsidies from natural gas prices. Kuang Sia suggested that the Government should provide the industry with time frame for three to five months and urged that they should also consider the price changes carefully. He also said that the price and supply of the gas is important and it should be compared to the other countries. Kuan also said that the increase the use of automation production regarding to the minimum wage policy. The industry now only needs four to five workers to produce one million pieces of gloves. However, they need to hire the human resources in order to operate and manage the machines in the manufacturing plants. Other than that, he also said that the next few years, the industry will be invested more to increase the production capacity.

The graph above shows that there is an increase in supply for latex. The change in quantity supply is when any factor that influences selling plans other than the price of the good change. Based on the article, there is one factor that influenced the change in supply which is expected future prices. The expected future prices is when the producers expect that the price of the latex will be decreasing in the future, then they are likely to sell more today. This cause an increase in supply and a rightward shift of the supply curve (from original supply curve to new supply curve). Now in the market, the price for latex is RM6 per kg and if the supply curve shifted to the right, the price is expected to fall to RM5 per kg. If the producers expect the price of the latex to increase in the future, the supply will decrease today and increases in the future. Thus, an increase in supply brings fall in price and increase quantity demanded. The graph shows that there is a surplus for the latex. From the graph above, the equilibrium is at RM6 and it moved to RM5. When the price is at RM6, there is a surplus. So, the price is cut down and moved it towards the equilibrium price. In addition, the rubber gloves and latex are complement goods. A complement is a good that is used in conjunction with another good. Therefore, if the price of latex falls, the people will buy more latex and more rubber gloves. So, it makes sense that the demand for rubber gloves will increase by 15% this year according to the article.

An increase in supply brings a small fall in price and a large increase in quantity. It shows that latex have a perfectly elastic demand. The quantity demanded changes by an infinitely large percentage in response to a tiny price changes.

The Top Glove Company is going to practice the minimum wage policy in doing their business. In economic terms, it is known as price floor. In other words, price floor is when the government would execute regulation that makes it illegal for employer to charge lower price than specific level set. The aftermath of a price floor on a market depend significantly on whether the floor is obligatory at a level that is above or below the equilibrium price. For illustration, if the equilibrium price is set above the price floor, it is a disadvantage to the Top Glove Company as they need to higher wages to their employees. As for some of the employees, it is an advantage to them. Whereas, if the equilibrium price is set below the price floor it will bring benefit to the Top Glove Company because they pay lower wages which is following their minimal wages policy. Referring from the graph drawn, surplus will occur when supply is more than demand. Therefore, surplus of workers will cause unemployment to occur. When there is unemployment, the unemployed workers will spend their time searching for other jobs. One of the main reason unemployment happens is because the company chooses to use automation for the production instead of using labour. I think that the minimum wage will bring benefits to Top Glove Company for a long run. It will encourage Top Glove Company to reduce their labour and improve on the manufacturing processes by using more advanced technology and methods.