Hardening rubber prices to put pressure on tyre makers’ margin: Crisil

Domestic prices of natural rubber closed August at Rs 238 per kg on an average, way above the trend in the past decade.

The last time the commodity breached the Rs 200a kg mark was in 2011, propelled by a demand recovery after the global financial crisis, and aided by the accommodative stance of the US Federal Reserve and other central banks. Prices had logged a compound annual growth rate of 101% between 2008 and 2011. However, the three-year surge did not sustain, and prices remained subdued below Rs 150 on average for a decade thereafter.

Now, since the end of 2023, prices have shot up again amid a raft of challenges. Tight supply of natural rubber globally cast a long shadow on the industry even as steady expansion of the automobile industry and other consuming industries kept demand healthy.

This upcycle is distinct from previous ones.

“While the previous spikes (in the past decade) were triggered by isolated events such as farmer protests over low profits in 2016 or the pandemic-induced labour crisis in 2020, the current price rise is rooted in fundamentals, i.e., demand and supply dynamics,” Pushan Sharma, director-research, Market Intelligence and Analytics, at Crisil said in a media release. “In 2011, the natural rubber market had sufficient supply to cater to global demand. Between fiscals 2011 and 2023, however, global production grew 35%, while demand expanded 40%, resulting in a supply crunch and, thereby, higher prices,” he said.”That has a huge bearing on the profitability of tyre makers as natural rubber is a major input, accounting for 20-40% of the weight of tyres, depending on the category,” said Crisil.The tyre industry accounts for around 80% of natural rubber consumption in the country. The margins of tyre makers, therefore, have a negative correlation with rubber prices.

According to Crisil, in the first quarter of this fiscal year, the operating margin of the top five Indian listed tyre manufacturers declined to 14% from 16% in fiscal 2024, as natural rubber prices shot up 22% on year.

“With further rise in demand and restricted supply, the prices of natural rubber are expected to remain elevated, impacting the margins of tyre manufacturers well beyond fiscal 2025. The deficit in the natural rubber market is expected to triple in 2024 as smaller tappable area and lower yield, along with a potential increase in demand, test the supply side,” said Mohit Adnani, associate director-research, Market Intelligence and Analytics.

In addition, while crude oil prices are expected to ease, leading to a decline in the cost of crude-based raw materials such as styrene butadiene rubber, poly butadiene rubber, carbon black and nylon tyre cord fabric, the rising cost of natural rubber is likely to drive up Crisil’s Basic Tyre Raw Material Index, which tracks the prices of these commodities. This fiscal year, the index is expected to print 4-6% higher, reversing a 5% decline in FY24.

“In the milieu, it becomes imperative for tyre OEMs (tyre makers) to explore ways to mitigate the impact of a prolonged supply shortage, such as developing alternative supplies or reducing costs by exploring imports from cheaper destinations,” said Crisil.