Natural and Synthetic Rubber is used in the manufacture of tyres and forms the major cost component (40%) of the raw materials for the Tyre industry. Prices of natural rubber in India jumped to a three-year high on Monday on thin supplies and tracking gains in overseas markets due to supply disruptions in top producer Thailand.
The spot price of the most-traded RSS-4 rubber (ribbed, smoked sheet) in Kottayam, the top rubber producing area in the southern state of Kerala, jumped by Rs.600 to Rs. 16,200 per 100 kg, the highest since January 2014. Rubber Board officials attributed heavy rains in North Thailand (a key growing area) since November 2016, speculative buying, rise in oil prices, increase in buying of vehicles in China as the reasons for the sudden spurt in prices.
The price of synthetic rubber has also increased due to the recent rise in price of crude oil. Natural rubber prices have a strong correlation with those of synthetic rubber, which is made from crude oil.
The major rubber producing countries are Thailand, Malaysia and Indonesia. Kerala state is leading rubber plantation state in India. Torrential rains and floods have hit southern Thailand, where around 80% of the country’s annual rubber output of 4.5 million tonnes is produced, thereby reducing supply.
The monsoon season in Thailand normally ends in the month of January and this is unlikely to help improve the demand supply situation for natural rubber as that period marks the start of Thailand’s dry cool season, when rubber trees shed their leaves and stop producing latex. The dry season normally starts in the month of February and runs through mid-April, when monthly rubber output drops on a sequential month on month basis.
The three major components of a tyre are its tread, carcass and sidewall. The approximate amount of rubber, both natural rubber (NR) and synthetic rubber (SR), in these three components are 35%, 35% and 15%, respectively with the remaining 15 % in the liner. In addition to rubber, a variety of other raw materials are used in the production of tyres, including tyre cord, carbon black (or in modern day green tyres silica based compounds), curatives, antidegradants, reinforcing fibers and processing oils.
Tyre companies in India are aggressively procuring from the domestic market as the import cost of natural rubber is currently on the higher side. The import price of rubber is Rs.240 per kg, forcing companies to depend on domestic procurement to meet their production requirements.
The Tyre industry expects reduction in the EBITDA and net profit margins on a sequential and year on year basis as Natural and Synthetic rubber prices have increased. It would be difficult for tyre companies to pass on the increase in the costs to the customers due to stiff competition among industry players. The temporary slowdown in the number of vehicles sold after the demonetization of Rs.1000 and Rs.500 notes is also a matter of concern for the Tyre industry. The effect would be visible in the third and fourth quarter results of the FY 2016-17.
Stocks prices of Indian tyre companies including Apollo Tyres Ltd, JK Tyre & Industries Ltd, CEAT Ltd and MRF Ltd have not yet corrected significantly since demonetization. The tyre companies are trading at a price to earnings ratio in the range of 6 to 10 and have given returns in the range of 20% to 37% in the last one year. Most of the tyre company stock prices have actually given a positive return year to date.
If natural rubber and synthetic rubber prices continue to rise in the near future the stock prices could correct as profitability gets hampered due to increase in raw material prices for the tyre industry.