Natural rubber prices have turned positive after a gap of two years in the domestic market during the first quarter of the current fiscal year. While this is a good news for farmers, tyre companies have been hit with a double whammy as demand for tyres is stagnant due to the slowdown in auto sales and raw material prices are only rising.
The price of natural rubber is up a staggering 23 per cent from a low of Rs 11,915 in January and is currently at Rs 14,579, according to Rubber Board data.
Mitul Shah, Research Analyst, Reliance Securities said, “Tyre makers have been facing tough situation the past 4-5 months due to the slowdown in automobile sales. Weak demand in the replacement segment has also had an impact on the financial performance of all tyre makers. Even companies exporting tyres are facing turbulence due to weak demand in Europe. Passing on any cost hike would be tough. Further, production cut announced by a few OEMs would also result in lower tyre sales in the first quarter of FY20."
Shah explains that these factors would increase margin pressure for all tyre makers, impacting their profitability in the first half of FY20. On the other hand, aggressive capex plan by these companies would further stretch their balance sheets going forward.
The upturn in rubber prices after a gap of two years has brightened prospects of a revival in tapping, abandoned earlier by farmers when prices fell. Giby Mathew. Director, Acumen capital Markets India Ltd said that with lower availability in domestic market and high duty expected to keep imports lower, prices are expected to touch Rs 17,000. Lower production in Kerala due to last year's floods, which had damaged plantations extensively, is likely to see lower arrivals the next two-three months.
Drought in China's Yunnan province, cut in exports by three major producers -- Malaysia, Indonesia and Thailand -- higher import by Chinese companies ahead of a hike in import duty and rising crude oil prices resulting in a spike in synthetic rubber prices, a substotute for the natural variant in some products, have also contributed to the rise in global prices of natural rubber.
Natural rubber output in 2018-19 is pegged at 648,000 tonnes, 6.6 per cent lower than the previous fiscal. Kerala is the largest producing state. Its consumption was up 9 per cent to 1.21 million tonnes in 2018-19.
K N Raghavan. chairman and Executive Director, Rubber Board projected a 750,000-tonne production figure for 2019-20, while consumption is projected at 1.27 million tonnes in 2019.
Import of natural rubbber was up 24 per cent in 2018-19 to 582,000 tonnes and expected to fall to 500,000 tonnes in FY20.
Satish Sharma, President, Asia Pacific, Middle East & Africa, Apollo Tyres Ltd, however, is not worried at least in the near term. He says, "The increase in natural rubber prices will come with a lag effect, and would impact us, if at all, only next quarter onwards. As far as the slowdown in tyre demand is concerned, while there is reduced demand from the OEMs, the replacement market is more or less making it up for that, especially for Apollo Tyres. We are hopeful overall demand will improve in the second half of the fiscal."