Rubber prices fell as Indian tyre makers started importing rubber about three months ago, when local prices were firm while they softened overseas. Photo: Prashanth Vishwanathan/Bloomberg
Rubber prices (RSS-grade 4) have plunged by about 22% after having scaled a 52-week high of Rs.195 in early August. Prices fell as Indian tyre makers started importing rubber about three months ago, when local prices were firm while they softened overseas.
The main dampener is that the demand-supply indicators point to oversupply in the medium term, following the weak demand from tyre manufacturers because of slowing auto sales. Rubber consumption in the European Union countries, the US, Japan and South Korea has declined considerably, while consumption in China is slow of late. “Most of the fresh plantations in Thailand, Indonesia and Malaysia came up in 2005. Given the seven-year gestation period, rubber supply from these three regions, which account for bulk of the global production, is likely to improve,” said Surjit Arora, an analyst at Prabhudas Lilladher Pvt. Ltd.
Lower rubber prices augurs well for tyre makers, for whom rubber accounts for two-thirds of raw material costs.
Data analysis of seven listed tyre firms shows that as material cost to sales declined in the last eight quarters from 65.5% to 58.9%, operating margin improved from 8% to 12.2%. Even on a year-on-year basis, September-quarter operating margin improved by around two percentage points on average. Reasonably good sales of replacement tyres helped volumes.
Margins could improve further if the lower rubber price is followed by a turnaround in the auto sector. No wonder then, in anticipation of better days ahead, shares of key manufacturers are on a roll. Since August, Ceat Ltd soared 114%, JK Tyre and Industries Ltd jumped 47%, Apollo Tyres Ltd by 16% and MRF Ltd by around 34%.
A further rise in tyre stocks will depend on improved auto sales in the domestic market, which is languishing, and also on profitability, which hinges on the extent to which tyre makers pass on rubber price declines.
Source:- livemint.com
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