As with any consumer good industry, tire prices have seen near consistent twice-annual increases for as long as anyone can remember. In tougher times, perhaps only one price hike; don’t want to chase away the consumer, after all! January
would bring one increase, and June the second. In both cases, those increases were erased within days as dealers and sales departments wheeled-n-dealed to fill order sheets.
About 10 years ago, things changed. Raw material (natural rubber, oil, steel, carbon black) prices began cheeping up upward on a consistent basis. Demands and market speculation pushed energy costs (oil, gas, diesel, natural gas) upward, as well. And they went up and up and up, and kept going up.
Tiremakers, forced to strike a balance, raised prices only incrementally, never taking full measure while eating some of the fast rising raw material and energy costs. Tire price increases between 3% and 6% were common, even as oil raced past $100 per barrel and kept going.
Oil eventually came back to earth (albeit for a short period), but NR became a huge headache for tire producers. While the world tried to recover from a global economic disaster, tire demand grew rapidly in India and China even as rubber cartels tighten their reins and demanded higher prices. Weather problems hampered latex production, already pressured because rubber demand had been badly underestimated.
Now, we are seeing twice-annual tire price increases, and these are ranging from 5% to 12%. Three increases in 2011 is not out of the question. Dealers are complaining bitterly, and are more angry about tire pricing than ever before. Analysts claim that even with bold double-digit increases, tiremaker price adjustments still leave them in negative territory vs. raw materials.
The big question is what can we do? Polymers & Tyre Asia magazine took a detailed look at the NR situation in India and Asia in a report published in its December 201/January 2011 issue. The publisher has been most kind to allow Tire Review to share its in-depth story in the multi-part online report “The Price Crisis.”
In what will be a four-part series in Tire Review’s World Tire Report and on our website, the series takes a close look at what is driving NR pricing and how it is impacting the tire industry.
Part I – Rubber Price Spike Punctures an Industry
By K.S. NAYAR – When India slashed duty on rubber imports amid rising prices, it failed to work even like a bandage to staunch tyre industry hemorrhaging. The measure was too little and too late in coming. Domestic rubber prices have soared to record highs taking cues from the world market. With US$3 billion planned for capacity expansion and greenfield projects, Indian and multinational tyre companies are in a quandary. The economy is booming and the burgeoning middle class is splurging on new vehicles. The tyre industry would have felt elated at the boom. But shortages of raw materials, particularly natural rubber – despite India being the world’s fourth largest producer – are causing concerns. It’s time rubber and tyre producers take synergic action backed by appropriate government policy measures to support the industry to boom
The scorching rubber prices are grievously hurting the Indian and international tyre industry. Prices have gone up by nearly two times from last year. Over the next 2-3 years, the projected rubber shortage is about 500,000 tons. Sourcing rubber and pricing of tyres have become great challenges, both for the producers and consumers.
Indian tyre makers, who have been complaining about a lack of level-playing field – tyre imports attract 8.5% duty while imported natural rubber draws a 20% levy – have gone to court for redressing their grievances. As the economy races at about 9% clip boosting demand for vehicles and tyres, manufacturers are elated at the business potential but are constrained to keep up with the growth in demand.
It is estimated that the size of the Indian passenger vehicle segment in 2020 will be close to 9 million units. It represents a huge growth opportunity for tyre manufacturers. In fact between July and October 2010 the auto growth touched a record 30% compared with the previous year. Demand has been growing in all segments – from luxury cars to two-wheelers. It is predicted that by 2050 every sixth car in the world would be produced for the Indian market.
The market prospects remain robust and the future is rosy. At present only eight in every 1,000 Indians own cars, and with GDP zooming more will be going for personal vehicles.
The passenger vehicle industry, which includes cars and utility vehicles, alone is expected to witness the launch of as many as 30 new models and variants in 2011. Analysts expect year-on-year growth in sales to be higher during the latter half of 2011, as compared to growth during the initial six months.
The projections made by the Automotive Mission Plan 2006-2016 showed that the growth would take the country from the global number eleven spot to four. Its contribution to GDP would rise from 5% to 10% with overall contribution of the manufacturing sector growing from 17% to 35%. The industry is expecting a turnover of US$122-$159 billion by 2016 compared with US$34 billion in 2006.
Bumps Ahead
But keeping pace with the double-digit compounded annual growth rate, which could continue over the 10-year period, is what the Indian tyre industry faces.
There are 60 tyre manufacturing plants in India run by 39 companies with a turnover of US$6 billion of which exports constitute US$650 million. The production in 2010/11 is estimated to touch record 121.4 million units with manufacturers ramping up capacity to meet demand.
As rubber constitutes about 42% of raw material costs in tyre-making, the industry is concerned about shortage and rising prices. Rajiv Budhraja, director general of the Automotive Tyre Manufacturers’ Association (ATMA), is worried about NR supply shortages (See accompanying story).
Obviously the Indian tyre industry, which is dependent on rubber imports to sustain its growth, is uncomfortable with the projected rubber shortfall of 687,000 tons in 2015. Within India, in the rubber growing state of Kerala that produces over 90% of the country’s output, rains have resulted in production decline.
The government’s belated move to cut import duty on NR shipments of up to 40,000 tons to 7.5%, from 20% till Mar. 31, 2011, has not excited tyre manufacturers as it would not bring much relief as domestic rubber prices still remain high. Indian buyers have stopped signing new NR import deals as they are getting it more than 15% cheaper in the local market.
In fact, Indian Rubber Dealers Federation shared the same sentiment of ATMA. It said the duty cut will not contribute to cooling the market as it does not cover shipment beyond Mar. 31, 2011, when rubber would again be slapped with 20% duty or Rs 20 per kg, whichever is lower.
“But 40,000 tons of imports up till March is too little and in a favourable domestic: international price parity would be consumed by the industry within a month,” Budhraja said.
Tyre manufacturers have regretted that no action is taken to address the anomalous ‘inverted duty structure’ as ATMA describes the government policy which imposes higher duty on rubber imports at 20% and a lower 8.5% on tyre imports. It has filed a petition in the Delhi High Court on this issue and the government has been asked to file its response. The case is posted for hearing on Feb 10, 2011.
Market Distortion
ATMA has been telling the government that the distorting duty and imports under regional trade pacts have resulted in Chinese and Korean tyres coming into India at massively discounted prices. Markets report that these tyres are available at 30%-40% cheaper prices. Chinese tyre imports have also gone up year-on-year by nearly 20% in trucks and 36% in passenger car segments.
Tyre makers also insist on a ban on futures trading, which they think is contributing to speculative activities pushing up the prices. Although rubber is actively traded on all commodity exchanges, it was banned for a brief period following intensive lobbying by the tyre industry and other end-users.
ATMA said it intends to persist with its charge of rubber price manipulation on the Ahmadabad-based National Multi Commodity Exchange (NMCE). The claim was rejected by the market regulator, the Forward Markets Commission, saying the price movement was based on basic demand and supply situation.
NMCE CEO Anil Mishra also rejected such claims and said futures in fact helped in price discovery and minimized risks (See accompanying story).
Budhraja said another factor that is boosting rubber prices is the entry of China as a major buyer. In the international market it is aggressively buying up rubber amid reports of decline in domestic stockpiles. There are also reports that NR stockpiles in Japan have fallen nearly 8%.
China also faced severe drought in the rubber growing Yunnan region at the beginning of 2010. In another rubber region Hainan, torrential rains have hit production. This has further reduced China’s domestic rubber output (See accompanying story).
International prices are greatly influenced by China, whose automobile industry is in the fast lane. “Going forward there is no possibility of any reduction in the demand from China,” Budhraja said commenting on the voracious appetite of the world’s largest tyre producer and rubber consumer.
Tightened Supply
India is another major consumer of rubber and with the economy booming the demand is only going to go up. Rubber consumption would climb to 1.89 million tons in 2020, compared with 930,000 tons in 2010 on the back of the country’s robust GDP expansion.
India consumes nearly one million tons of rubber annually, which, till a few years ago, was almost equally split between the tyre and non-tyre industries. Spurred by growth in automobile sector, tyre sector’s demand for rubber is likely to be two-thirds in the near future.
The high rubber demand across all segments has led to widening deficit, points out Vinod Simon, president of the All India Rubber Industries Association. He sees the deficit ballooning from 1750,000 tons to 840,000 tons in 2020.
India is likely to produce around 850,000 tons of NR in 2010/11, down 4.8% from an earlier estimate, after heavy unseasonal rains affected tapping.
Jom Jacob, senior economist with the Association of Natural Rubber Producing Countries (ANRPC) expects an additional supply of 1.13 million tons coming into the international market in 2012. His assumption is based on the fact that about 2.55m hectares would be opened for tapping from 2012-2017. This is equivalent to 36% of the yielding area of the ANRPC-member countries.
Singapore-based International Rubber Study Group analysis shows that global rubber demand is likely to reach 23.9 million tons in 2010 and 25.5 million tons in 2011. It forecasts NR output of 10.2 million tons in 2010, rising to 15.4 million tons in 2020.
Whatever may be the statistics, there certainly is a perceptible drop in NR supplies in the international market where buyers are chasing the scarce commodity pushing up the prices. Besides a 34% gain in prices in 2010 on increased demand from China and India, heavy rains and floods in major producing countries, including Thailand – the world’s larger NR producer and biggest exporter – have disrupted tapping.
Worrisome Situation
The rubber shortage is expected to persist in the short-term. Not only in Thailand, but also in Indonesia and Malaysia where tapping operations have been hit due to rains. This has resulted in overall production drop.
The situation has prompted buyers from China, India and Japan to enter the market vigorously kicking up prices.
In India the government-controlled Rubber Board has released provisional figures on NR production, which showed a drop of 5.4% in November 2010 to 88,500 tons as against 93,500 tons during the same month in 2009.
While rubber output continues the declining trends in 2010-2011, the auto boom in China and India are putting greater pressure on rubber supplies. Investment dollars are pouring into the southern Indian city of Chennai, which is becoming the hub of tyre production because of its proximity to rubber growing southern state of Kerala, which contributes to almost 90% of the country’s NR production.
Most end-users of rubber believe that there is a powerful political lobby among Kerala rubber growers who are influencing government policies on pricing and imports. They also point out to various contradictions in rubber statistics given by Rubber Board.
ATMA is not confident in relying on Board’s rubber production and stockpile figures.
The tyre makers’ body says that the actual production data for November 2010 showed a far steeper fall of 15% over the projected data for the month at 104,000 tons. It has also questioned the Board’s claims on rubber stocks.
“In our considered view the natural rubber stock, as projected by Rubber Board, is much higher than the actual stock according to the assessment of the industry and other stakeholders, including dealers and traders,” Budhraja said.
“What lends credence to our contention that India’s natural rubber stock is way off the mark is the fact that India’s closing stock is shown to be 38% of the country’s total production,” he said.
At a time when natural rubber prices are ruling at an all time high and availability is a concern, such high levels of stocks are simply unrealistic. Even in countries such as Thailand, Malaysia and Indonesia which are the largest rubber producers but do not rank among the largest consumers, the closing stock stands at a mere 7%, 14% and 3% of rubber production respectively. “This shows that much of the Indian rubber stocks are on paper only,” Budhraja was quoted as saying.
Ground Reality
While the statistical jugglery continues, the ground reality is the enormous growth in the Indian auto sector pushing up demand for tyres and consequently rubber. While the government is shying away from reducing the import duty to meet NR demand, tyre producers are saying that their margins are getting squeezed because of the relentless rise in rubber prices.
ATMA had earlier asked the government to import 200,000 tons of natural rubber at zero duty and distribute it among users. This would have cooled the overheating prices.
China has formulated industry-friendly policies and is imposing 40% duty on imports of finished goods. Beijing has also gone all-out to support the domestic industry by buying rubber plantations in Africa, Thailand, Vietnam and Indonesia to ensure increased supplies of rubber.
ATMA President and Apollo Tyres Managing Director Neeraj Kanwar said there are reasons to believe that the actual cost of domestic NR prices is inflated. The cost of production of NR works out to Rs 55-60 per kg, which, even with a substantial profit margin of 20%, should be Rs 75 per kg at the maximum. “Prices of natural rubber should not move beyond this level under any circumstances,” he said.
The current rubber trends are boosting the prices of styrene butadiene rubber (SBR), widely used in tyre. Its demand is outstripping supplies fuelled by downstream tyre makers stepping up SBR use because of the more expensive NR.
However, a quick addition of SBR in order to reduce NR content is not feasible as switching to a new combination in the compounding process takes time.
However, demand for SBR in India is steadily going up. World’s top synthetic rubber producer Lanxess said it sees a big jump in SR consumption driven by high demand, particularly by manufacturers of radial tyres.
Lanxess Managing Director and Country Representative Joerg Strassburger said he is currently finding a shift towards replacing NR with SR in a variety of applications. SR consumption was up 26.6% during April-July of 2010 fiscal year, compared to 4.9% in the same period of 2009-10. In volume terms, total SR consumption increased to 132,925 tons in April-July, against 104,955 tons in the same period of the previous financial year.
However, the trend towards greater use of SR is unlikely to have a major impact on the upswing in NR prices. Price trends could be sensed from the futures markets such as TOCOM and Shanghai, where there is a steady rally in prices in view of tightening global supplies.
Tapping Problems
While tyre producers are saying that their margins are getting squeezed because of the soaring prices, rubber cultivators have their own woes to tell, particularly that they live at the mercy of weather and the markets.
There is an acute shortage of tappers in Kerala prompting the establishment of a Tappers’ Training School in the major rubber-growing district of Kottayam in central Kerala. It offers a 30-day training course at a stipend of Rs 150 (US$3.25) per day with free accommodation. Even then local workers are not available as they have more remunerative jobs in other sectors of the state economy,
Kerala and some small parts of Karnataka have rubber plantations, while in the North East rubber growing is being encouraged with the hope that it would add to efforts to increase overall NR production. About 100,000 hectares in the northeastern state of Tripura has been identified for rubber cultivations, which would be in addition to the existing 50,000 hectares. Such initiatives, of course, are not sufficient to meet the projected NR demand.
In a bid to raise output Rubber Board is also planning field trials of genetically modified rubber, which rubber growers have welcomed. They say that such initiatives are absolutely essential to meet the country’s demand of 1.5 million tons of NR annually.
China is also developing GM rubber and may sell it cheaper in the Indian market at the cost of domestic plantation industry, people supporting the GM trial said. However, the issue has raised concerns among environmentalists and the state government, which has earlier opposed GM trials of certain vegetables.
Gathering Clouds
But the global rubber situation does not augur well for the tyre industry. ANRPC’s Jacob said the tight situation is likely to worsen. The concerns over NR supply are likely to persist until the end of 2011.
“International prices of natural rubber are still high,” George Valy, president of the Indian Rubber Dealers Federation, was quoted as saying. “It’s Rs 223 per kg vis-a-vis domestic prices of Rs 207 a kg. Adding 7.5% import duty, the landing cost touches around Rs 240 a kg. This is not an economic proposition,” he said.
NR prices have been on the rise for the past few months due to non-stop rains in central Kerala and the Malabar region, which has hampered tapping activities. In this context Indian tyre companies will have no choice but to raise prices. If that happens, which appears necessary to take the pressure off their margins, it would be the fourth hike in a year.
NR constitutes 40%-45% of the raw material cost in tyre making. If the price levels hover around Rs 200 a kilo, then the bottom line of the entire Indian tyre industry would come under fatal pressure.
With the current rise in NR prices, the tyre industry profits could get punctured grievously. That would sap its dynamism as it takes up expansion plans, product diversification and technological upgradation to meet the robust demand from the auto sector. (Courtesy of Polymers & Tyre Asia)
(Source: http://www.tirereview.com/Article/83933/the_price_crisis_a_special_report.aspx)
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