Tyre makers are staring at lower profitability owing to a 20 per cent jump in prices of natural rubber, their primary raw material.
After hitting a multi-year low, prices have surged by up to 20 per cent in a matter of just six weeks. Kerala, the largest rubber producing state, is heading for Assembly elections in May. The international price of rubber, too, has moved up by about 15 per cent.
Natural rubber accounts for almost 40 per cent of the raw material cost of tyre manufacturers. “Every rupee increase in the price of natural rubber impacts the profitability of the tyre industry by Rs 60 crore,” said Gaurav Kumar, chief financial officer, Apollo Tyres, the country’s second largest tyre maker by revenue.
According to the Rubber Board, the price for RSS-4 grade rubber was Rs 114 per kg and RSS-5 grade sold for Rs 111 per kg in Kochi on Monday. Tyre makers use a mix of imported and domestic rubber as raw material.
Almost every tyre manufacturer saw a jump in profitability in the last few quarters, helped by a steep decline in rubber prices. Apollo saw its (standalone) net profit in the first three quarters of the financial year jump 39 per cent to Rs 641 crore. TVS Srichakra's net profit zoomed 109 per cent in the nine months ended December 31, 2015, to Rs 145.77 crore.
“Rubber prices had bottomed out in the past year and we were expecting its recovery sooner or later. Rubber prices are likely to move northwards for the next quarter or so,” said Kumar.
Tyre makers may find it difficult to pass on the increase to finished product prices. “The automobile industry, especially motorcycles and tractors, is not growing. Most car manufacturers are not showing growth. In the heavy vehicle tyre space there is competition from Chinese imports. In these circumstances, passing on the raw material increase looks tough,” said an analyst tracking the sector.
In addition to rubber, firmness in crude oil prices, which fell to sub $30 a barrel early this calendar year and has bounced back to $39 a barrel, is a cause of concern for tyre companies. Tyre makers use certain derivatives of crude oil. Along with rubber, the impact from crude oil translates into a higher raw material cost for the industry.