Rubber price surge may deflate tyre stocks

M.R. Subramani

Chennai, April 1

The stocks of tyre companies have had a good run this year. Some of the scrips have increased nearly 10 per cent. The run-off has been since sales of commercial vehicles and cars have increased rapidly since January. Also, tyre companies are witnessing a good demand from the original equipment and replacement markets.

But the good run seems to be threatened and it is likely that it may come to a halt this quarter.

This is because tyre companies have already come under pressure as input costs are surmounting. The tyre industry is very cost-intensive beginning from the main raw material – natural rubber.

Besides, other ingredients such as nylon cord or carbon black are all dependant are derivatives of petroleum products.

Natural rubber prices

What is worrisome for the tyre manufacturers is that natural rubber is zooming to fresh high each passing day.

On Thursday, RSS (ribbed smoked sheet) 4 grade rubber, mainly consumed by the tyre companies, was quoted at Rs 157.25 a kg.

In Thailand, RSS 3, the equivalent of India's RSS 4, fetched a record $3.50 a kg this week.

Summer is not in full flow. Even before that, the prices are surging, mainly on hot weather being experienced in countries where rubber is grown. A severe drought in China's rubber growing areas is also compounding the scenario further.

Tapping hit

Reports from the growing areas say that tapping has been affected due to the hot weather. If the current situation is so, one can imagine how things could be in the coming days when the weather will be even more hotter.

Already, there is a talk in the market circles that it wouldn't be surprising if rubber prices touch Rs 200 a kg.

Rubber is the main raw material for the tyre sector and it makes up 42 per cent of the input costs.

A Re 1 increase in the prices of natural rubber imposes a Rs 60-crore burden on the tyre industry as a whole given the annual consumption of nearly six lakh tonnes.

In view of the fact that prices are running up globally, imports against export of tyres don't look feasible.

Crude oil

The other worrying factor is the rise in crude oil prices. Falling dollar and euro have driven crude oil to around $83 a barrel this week. Nylon cord that makes up nearly 18 per cent of the input costs for the tyre is a derivative of petroleum products. As a result, cost pressure on it is also building up. The same holds good for carbon black too.

According to the Automotive Tyre Manufacturers' Association, the prices of tyres will have to be increased at least 20 per cent to square the rise in input costs.

“But that is neither feasibly nor possible,” says Mr Rajiv Buddhiraja, Secretary-General of the association.

This means the tyre companies profits are all set to increasingly come under pressure. Maybe, they are already facing the heat of the increase in the input costs.

In such a situation, it is unlikely that they will report good results in the first quarter of the current fiscal.

(thehindubusinessline.com)