Rubber, Crude and Tyre stocks: All set on sail

By Rutam Vora

The recent uproar over a sustained rise in rubber prices, which is said to have started hampering profits of the tyre manufacturers, has drawn attention of rubber consumers across the world. However, it is evident from the stock price movement of the rubber users, mainly the tyre makers, that the gain in the stock valuations over past one year have appreciated heavily on the bourses, becoming a favourite pick for the investors. 

History of rubber prices 

Historically, rubber prices have maintained a sluggish pace during 1998 to 2002 with prices being range-bound between Rs.2000 per quintal to Rs.4000 per quintal. Similar was the case with crude prices that had maintained a steady pace till April 2004 with prices hovering around USD 30-40 per barrel. But in the later period, rubber prices outperformed crude prices, with prices shooting up more rapidly than crude till October 2008, after which a steep correction was witnessed in both the commodities. 

According to the data, in 2009, Thailand lead the global rubber production with 39% share of total production at 3036 thousand tonnes, while Indonesia ranked second with 2595 thousand tonnes, constituting about 29%. Malaysia and India contributed almost equally with 856 thousand tonnes and 820 thousand tonnes respectively. 

Rubber prices have shown upbeat trend especially following the crude prices. Rubber prices can be matched with the rising crude prices as synthetic rubber making consumes crude oil as its key ingredient. However, over past one year, crude as well as rubber prices have remained upbeat. Considering the global shortfall in the crop with major cultivation area in south-west Asia is witnessing about 3% production shortfall, the prices are feared to head northwards. Experts opined that the global demand-supply situation for rubber is very tight that even a small mismatch on either side could create huge impact on the prices world over. 

Rubber-crude oil co-relation 

Since the bulk of the rubber produced is the synthetic variety, which is derived from petroleum. Up to some extent, prices of even natural rubber are determined to a very large extent by the prevailing global price of crude oil. Figures suggest that there is a 91% correlation between rubber and oil prices from April 1998 to the recent period. Rubber prices have surged from around Rs.2000 per quintal in April 1998 to Rs.14,000 per quintal in October 2009, while crude prices have shot up from around USD 20 per barrel to USD 80 per barrel by October 2009. This shows astounding relativity between the global economic indicator and rubber prices. 

Tyre makers and stock movement 

Tyre makers constitute about 60-70% of the total rubber consumption in India, while rest of which goes to various non-tyre applications including making of medical gloves, slippers, latex etc. 

However, a recent splurge in rubber prices does not seem to have hampered stock price movement of the tyre makers, which has continued uptrend despite steep rise in the key input material. India’s one of the largest tyre maker, MRF Ltd (BOM:500290) has gained about 311% in past one year on the Bombay Stock Exchange (BSE). The company’s market capitalization has jumped to Rs.29.49 billion as on March 26, 2010.

Another tyre manufacturer, Appolo Tyres Ltd (BOM:500977) yielded equally heavy return of about 312% on stocks valuations over past one month. The company’s market capitalization, as on March 26, 2010 stood at Rs.37.10 billion. Goodyear India Ltd (BOM:500168) has surged over 200% during the given period. Meanwhile, JK Tyre & Industries Ltd (BOM:530007) posted the maximum gains of over 400% in past one year. 

Considering the robust stock price appreciation of the tyre makers, the rubber prices do not seem to be hampering the stock movement on the bourses. However, the steadily rising rubber prices have made a dent in the pocket of the actual consumers, but investors of tyre stocks have no cause of worry as they are cashing on the dual opportunity of price rise in crude oil and appreciation of rubber stocks.

Vora is Special Correspondent with Commodity Online News Service

(commodityonline.com)