Tyre Manufacturer’s To Benefit From Low Rubber Prices

Due to a steep fall in the price of the natural rubber which accounts for about 44% of the total raw material, the stock price of tyre manufacturers have started to rally. Rubber is currently trading at Rs 148 per kg down by more than 13% as compared to Rs 168 during the month of March 2013. As the price of rubber has reduced the raw material cost of the tyre manufacturing companies have come down and this has helped the companies to increase its profitability. 

Due to a fall in price of the rubber and in a hope of better margin the stock prices of the tyre manufacturing companies in the last one year has performed well on the bourses.

During the month of July-August the farmers, in a hope to increase the price of rubber held back their stocks. The tyre manufacturer provided 20% premium of the global price to the domestic rubber manufacturer, but due to supply constraints the tyre manufacturers started to import from the overseas and imported around two third of the total domestic demand. Due to this the domestic price of the rubber has reduced by 30% to Rs 148 per kg in March 26, 2014 as compared to Rs 195 per kg during the month of July 2013.

Farmers from the state of Kerala contribute more than 90 per cent of the total natural rubber production in India. To safeguard the domestic rubber producers the Kerala government has started to intervene the market by purchasing natural rubber with an additional Rs 2, than the market price to raise the prices to Rs 171 per kg, which was an average of domestic price over the last three years, i.e. from the year 2009-10 to 2011-12. But it is not going to impact a lot because the government during the first phase will purchase only 10,000 tonnes of rubber from the growers. 

The other important thing is that the farmers now have new stock of rubber available as the tapping period for rubber in India (from October to January) has came to an end, while the old stock is still available with the farmers. Due to this the supply has increased and we don’t expect any increase in price of rubber in the coming months. Even if the government hikes the import duty or bans the rubber import, even then the domestic price is not going to increase much because of huge supply of rubber.

Currently, the rubber importers as an import duty has to pay Rs 30 per kg or 20 per cent, which-ever is lower. The import of rubber from the international markets is priced at Rs 117 per kg. The difference in the international and domestic rubber price is huge, even when you add the import duty of 20% to the international price the total accounts to Rs 140, whereas the domestic price of the rubber is Rs 148. The rubber importer will benefit more than Rs 8 on per kg of import of rubber.