Mumbai: Indian tyre makers see little respite for margins despite the government’s move to cut import duty on natural rubber - already in short supply - as raw material prices continue to be robust, industry watchers said.
Natural rubber prices makes up about half the cost of a tyre and the industry has been grappling with falling profit margins as rubber prices soar due to a global supply crunch.
India on Thursday cut import duty on natural rubber to 7.5% from 20% for shipments up to 40,000 tonnes until 31 March.
The duty will be reinstated at whichever is the lower of 20% or Rs20 per kg after that date. That would mean an import duty of 9-10% from April, at prevailing rates.
“Profit margins will continue to be under pressure as rubber prices have gone up beyond Rs200/per kg. Demand is higher than supply so chances of rubber prices really coming down are low,” said Vaishali Jajoo, analyst at Angel Broking.
“The gap between international and domestic rubber prices has reduced so I don’t know how much it would benefit the tyre companies. I don’t think there will be much of a reduction in costs,” Jajoo added.
Nevertheless, tyre firms’ shares rose on the news. Number one player MRF rose as much as 4.5%, rival Apollo Tyres was up 5% and JK Tyre & Industries also jumped nearly 5% on Friday.
However, shares of all three firms have underperformed the benchmark index over the past three-month, Thomsonreuters data showed.
“The government has addressed the long-standing request of the industry. This should have happened long back when prices in domestic market were higher than international market,” said Rajiv Budhraja, director-general of New-Delhi based Automotive Tyre Manufacturers’ Association.
For several years now, the industry had sought a cut in the 20% customs duty on natural rubber, which is double that for tyre imports, which has hurt local players.
“Domestic prices will remain stable despite duty cut as they are lower than international market,” George Valy, president of The Indian Rubber Dealers Federation, told Reuters.
“Indian tyre makers will start imports once international prices fall below domestic level. Then they will benefit from lower duty,” Valy said.
On Friday, the spot price of the most traded RSS-4 rubber (ribbed smoked sheet) was Rs20,750 ($460) per 100 kgs in India as against Rs22,282 ($494) in Bangkok.
“We had initially approached the government for relief on this when domestic prices were significantly higher. At this point of time I’m not sure whether the gap is still there and therefore if imports would make sense,” said Sunam Sarkar, chief financial officer, Apollo Tyres, India’s second largest tyre maker.
“The move will definitely boost sentiment,” said A.S. Mehta, director-marketing at JK Tyre.
However, “the larger issue is, availability in the country today is a constraint. This would certainly help in bringing in more rubber,” Sarkar said.
India is likely to produce around 850,000 tonnes of natural rubber in 2010/11, down 4.8% from an earlier estimate, after heavy unseasonal rains affected tapping.
The country consumes nearly 1 million tonnes of rubber annually, split roughly halfway between the tyre and non-tyre industries.
“But 40,000 tonnes of imports uptil March is too little and would be consumed by the industry within a month,” Mehta said.