By Ruma Dubey

Rubber farmers in Thailand, one of the world's biggest exporters of natural rubber, threatened on Friday (Nov 10) to protest in the capital Bangkok if the military government does not help to prop up falling prices of the commodity. Their cost of production is higher than the selling price of rubber. Thailand rubber prices have plummeted to about 48 baht, a fourth of the levels seen five years ago. In India, on 15^th November, rubber prices hit a new 52-week low.

But what is very unusual this time around is that in 2018, we have been witnessing the increasing spread between the rubber prices in India and that quoted in Bangkok. As at 20^th Nov’17, rubber price in India was at Rs.125/kg while that in Bangkok was at Rs.101/kg. Little wonder then that tyre companies are grinning ear-to-ear.

Under the current circumstances, naturally they will import the cheaper rubber but even in India, the prices are at a year low. This means stocking would give them a price advantage, be it procured from India or imported.

Price of rubber has a direct impact in tyre companies as 40-50% of their cost is on account of this main raw material. One should expect margins to spurt. But wait, it might be a trailblazing runaway jump as the lower price of rubber could be offset to some extent by the higher crude price. Crude derivatives are also inputs for tyre companies and that makes up for around 25% of the costs. But because the slump in rubber price is much higher than the rise in crude price, tyre companies will continue to have an advantage.

Rubber is a cyclical trade. Rubber tree saplings take 7-10 years to mature after which a sticky, cream-like sap is used to produce tyres and other goods. Those in the industry say that major rubber producers will soon be unable to supply sufficient quantities of rubber to tyre factories in China and other importing countries because rubber saplings have not reached the right age for harvesting. Thailand, along with Indonesia and Malaysia, produce nearly 70% of the world’s natural rubber. 

And the best news is that – prices are expected to slump further. This is based on the fact that in coming days, supply of rubber will go up as October to January is the time when peak tapping happens. Over and above all this, rubber suppliers were sitting on stocks, holding on to its, expecting prices to go up and with their calculations going for a toss, this supply of old stock is also coming into the market now. 90% of natural rubber in India comes from Kerala and while tyre makers rejoice, rubber cultivators are crying, urging the Govt to hike import duties, with some even demanding a complete ban on rubber imports.

All this translates into? Price of rubber is not going to go up in a hurry. We will witness a buyers market and this means good times for tyre makers in the coming quarter. Look at Ceat. In Q2FY18, the company’s EBITDA was at Rs.181 crore, up 211% (QoQ) while EBITDA margins rose to 11.9% v/s 4% in previous quarter. Its raw material cost has come down 16%  (QoQ). Ditto for Balkrishna Industries, whose raw material cost was sequentially down just a little over 1%. JK Tyre too reported a 16% drop in raw material prices on QoQ while that of  TVS Srichakra was down 11%, Apollo Tyres was down 9%  and MRF was down 6%.  

In Q2FY18, the raw material cost eats away around 60% of MRF’s total sales, Apollo at 49%, Balkrishna at 45%, Ceat at 53%, JK Tyre at 56% and TVS Shrichakra at 54%. If price of rubber remains around the same levels or climbs down further, the margins of tyre companies are expected to see a straight improvement of 10-13%. To boost volumes, companies might lower rates but they are sure to retain the lion’s share of the margin for themselves. H2FY18 could see direct benefits of the same.

Along with the lower rubber price, wth the auto sector also doing pretty good, weak demand in China and the Govt bringing back the anti-dumping duty to fend off cheaper Chinese tyres has made the overall outlook for the tyre sector robust.

Yes, the road ahead for tyre companies currently looks good, with a beautiful vista on the horizon.