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Natural rubber stands as a cornerstone in the global commerce landscape, permeating countless everyday products, notably in the tire industry. However, recent months have seen an unprecedented surge in its prices, signaling a significant shift in the market.
Driven by a complex web of global factors, this surge in natural rubber prices has reverberated across industries, particularly impacting the tire sector. From disruptions in key rubber-producing nations to logistical hurdles exacerbating supply shortages, the crisis has left its mark worldwide, with countries like India feeling its effects acutely due to the sector's economic importance.
In this blog post, we delve into the heart of the natural rubber crisis, examining its origins, its impact on the tire industry, and the uncertainties it poses in both the short and long term.
India's natural rubber market is witnessing an unprecedented surge, with prices threatening to surpass the highest levels seen in over a decade (last peak: ₹191 per kg in late 2021). This surge, driven by a convergence of global factors, has sent shockwaves through the crucial tire industry in the country.
At the heart of this rally is a global shortage of Natural Rubber (NR), primarily attributed to production disruptions in key producing nations. Key factors contributing directly to this surge include:
This shortage is starkly reflected in the price of RSS 3 sheet rubber, a benchmark variety, which has surged by nearly 50% since January 2024, reaching an astonishing ₹225 per kg. The impact is felt across various segments of the rubber market, with the price of RSS 4 rubber, commonly used in the auto industry, also witnessing a significant jump of 16% this year, reaching ₹180 per kg.
Analysts foresee further increases, with projections indicating a potential rise to ₹200 per kg in the coming months. This surge poses a significant challenge for Indian tire companies, which account for approximately 70% of the country's natural rubber consumption.
Here are some additional key points worth noting:
Rising natural rubber prices will directly impact tire manufacturers' production costs, potentially squeezing their profit margins. Analysts at Kotak Securities warn that these companies may face pressure in the coming quarter, with concerns about profit margin moderation.
J.K. Tires, a major industry player, acknowledges the impact on costs and the potential need to pass it on to consumers through price hikes. However, this strategy could be difficult to implement in segments like truck-bus tires, where demand is already slowing at 5%.
Additionally, Nomura India's latest note on the tire sector highlights a second round of cuts in tire prices, with leading tire players like Apollo Tyres and JK Tyre implementing price reductions of 1.5-2% on select high-selling SKUs of TBR tires, in response to the escalating NR prices.
In the near term, the outlook for the natural rubber (NR) market remains uncertain, with experts predicting a continuation of the global shortage in the coming months. Projections suggest a potential deficit of one million tonnes between March and May, underscoring the severity of the supply constraints.
The Rubber Board's recent incentive scheme for natural rubber exports at ₹5 per kg, effective from March 15 to June 30, 2024, has the potential to further tighten domestic supply and exacerbate price pressures.
However, some analysts believe this crisis may be temporary, anticipating a shift as production ramps up later in the year, particularly with the onset of the southwest monsoon in June. Additionally, a projected recovery in tire demand later in the year offers hope amidst the uncertainty.
Additional factors contributing to the short-term landscape include the recent 5% rise in Brent Crude oil prices ($86.13 a barrel), adding to cost pressures on tire companies reliant on this key raw material for tire production. Despite a slight dip in international rubber prices, domestic prices are expected to remain elevated due to lower production during the off-season and an anticipated decline in availability as the season draws to a close.
Furthermore, the stock prices of major tire companies like CEAT Limited, MRF Tyres, Apollo Tyres, JK Tyre, and Goodyear India have experienced significant declines as investors react to the rising cost of raw materials.
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Looking beyond the immediate challenges, the long-term outlook for the industry remains cautiously optimistic. Indian rubber production has seen a modest increase in FY24, reaching 7,39,000 tonnes by January.
However, this growth is matched by a parallel increase in consumption, highlighting the imperative for increased domestic production to meet demand. The industry must closely monitor global natural rubber market dynamics and remain adaptable to potential price fluctuations to sustain long-term growth.
Initiatives such as the Rubber Board's efforts to explore export opportunities and promote Indian rubber under the brand 'Indian Natural Rubber', as well as the expansion of rubber plantations under the Indian Natural Rubber Operations for Assisted Development project in northeastern states, demonstrate proactive steps towards addressing supply challenges.
Additionally, the manufacturing industry plans to invest Rs 1,000 crore in new plantations and Rs 100 crore to improve rubber quality through training and best practices, signaling a commitment to long-term sustainability and resilience in the face of market volatility.
Despite political assurances, the prices of natural rubber in Kerala are predominantly shaped by market dynamics, with governmental intervention reserved for instances of drastic price fluctuations.
Kerala stands as the largest producer of rubber in India, boasting an annual output of 600,000 tonnes, and its price affects the livelihoods of nearly 800,000 families. However, the state's rubber farmers grapple with challenges, including meager prices offered by local merchants and the burden of high farm worker wages.
The state government's attempt to increase the minimum support price to Rs 180 per kilo hasn't significantly improved farmers' earnings. The rejection of the rubber lobby's demand to reduce import duty indicates ongoing debates over protecting local rubber interests.
In response to these challenges, the government has announced a substantial increase in the financial package for the rubber sector, allocating ₹708.69 crore over the next two years. The aim is to stimulate natural rubber production, enhance productivity, and reduce import reliance.
This infusion of funds will support various initiatives, including plantation efforts, the generation of planting material, productivity enhancement measures, the formation of rubber producers' societies, and research/training endeavors.
Notably, assistance under this scheme extends beyond traditional rubber-producing regions like Kerala, Karnataka, and Tamil Nadu to encompass non-traditional areas such as Andhra Pradesh, Odisha, and northeastern states. The initiative targets a total of 12,000 hectares and 3,752 hectares in these regions, respectively, with an increased assistance rate per hectare set at ₹40,000.
Special provisions are also made to support scheduled caste growers, with additional assistance in the form of planting materials valued at ₹50,000 per hectare.
The overarching focus of these efforts is on expanding planted areas and accelerating rubber plantation development in non-traditional regions, particularly in the Northeast, in a bid to diversify and strengthen the state's rubber industry.
In the Indian tire industry, the surge in natural rubber prices poses a significant challenge, impacting production costs and profit margins. As we've explored the various factors driving this surge, it's evident that proactive strategies are essential for mitigating its adverse effects.
For Indian tire manufacturers, strategies such as diversification of raw material sourcing, investment in technology and innovation, and optimization of supply chain logistics are critical for enhancing competitiveness and resilience in the face of market volatility.
Additionally, building stronger partnerships with rubber producers and leveraging government support initiatives can help alleviate some of the financial burdens imposed by rising rubber prices.
Looking ahead, the tire industry in India must remain agile and forward-thinking, continuously seeking opportunities to optimize operations, reduce costs, and innovate. By embracing sustainable practices and harnessing emerging technologies, tire manufacturers can not only weather the current challenges but also position themselves for long-term success in a rapidly evolving market landscape.
As stakeholders in the Indian tire industry, it's imperative that we collaborate, share insights, and collectively work towards solutions that drive growth and sustainability.