Rising rubber prices to deflate tyre makers' margins

Tyre makers are staring at a deflated profitability owing to a 20% jump in prices of natural rubber, the primary raw material. After hitting a multi-year low, prices have surged by up to 20% in a matter of just 5-6 weeks. Kerala, the largest rubber producing state, is heading for assembly elections in May. International rubber price too has moved up by about 15%.

Natural rubber accounts for almost 40% of raw material cost of tyre manufacturers. “Every rupee increase in the price of natural rubber impacts the profitability of the (domestic) tyre industry by Rs 60 crore. Without doubt, the increase in rubber prices will result in lower profitability for the industry,” said Gaurav Kumar, Chief Financial Officer, Apollo Tyres, the country’s second largest tyre maker by revenue. According to Rubber Board, rubber price for RSS-4 grade was Rs 114 per kg while RSS-5 grade sold for Rs 111 per kg in Cochin on Monday. Tyre makers use a mix of imported and domestic rubber as raw material.

Almost every tyre manufacturer saw 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% to Rs 641 crore. TVS Srichakra's net profit zoomed 109% in the nine months ended December 31, 2015 to Rs 145.77 crore.

The rubber prices had already bottomed out in the past one year or so, and we were expecting its recovery sooner or later. Going forward, the rubber prices are likely to move further northwards for the next quarter or so, said Kumar.

Tyre makers may find it difficult to quickly 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 price 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 in production process. Along with rubber, the impact from crude oil translates into a higher raw material cost for the industry.