Mumbai: Tyre makers are likely to see improved profitability from the September quarter aided by a correction in rubber prices and higher product prices, leaving behind two quarters of lower margins, industry officials said.

Natural rubber makes up more than 40% of the cost of a tyre and its prices have fallen over 12% from a peak of 24,300 per 100 kg struck on 5 April.

“Rubber prices have come down from its peak. It should benefit us from second quarter," said Anant Goenka, deputy managing director, Ceat Ltd , India’s fourth largest tyre maker.

Rubber prices jumped 49% in 2010 on robust demand from tyre-makers trying to meet orders from the booming auto industry. But a rise in rubber prices in domestic and international market raised production costs, pinching margins.

To offset the rise in production cost, tyre-makers have steadily raised prices all through this year and no one has immediate plans for a price cut despite the recent rubber price fall.

“Most of the companies keep one-and-a half months of inventory, so in Q1 no impact would be felt. From Q2 there would be a positive benefit as rubber prices have fallen, they have taken some price hikes," said Deepak Jain, auto analyst at Sharekhan.

Ceat reported a net loss in Jan-March and profit at Apollo Tyres fell 43%. But shares of the top four tyremakers gained between 11-12% since the beginning of June when rubber prices started correcting.

The slowdown in auto sales in India in the past two months has made difficult for tyre-makers to raise prices further and most tyre makers were saying they have no plans to raise prices in short-term.

Car sales, which grew at a breakneck 30% in FY11, are expected to slow to 10 to 12% this fiscal, down from an earlier forecast of 16 to 18%, industry group Society of Indian Automobile Manufacturers forecast.

Car sales in Asia’s third largest economy, which in June saw their slowest pace of growth since March 2009, are driven by a burgeoning middle class that relies on bank loans for purchases. But RBI has raised interest rates 10 times since March last year in an effort to battle stubbornly high inflation, a move that has hurt credit-based purchases.

The Reserve Bank of India (RBI) is expected to raise its key policy rate by a further 25 basis points next week after inflation quickened in June and may hike once more by the end of the year. .

“July is going to be a tough month and the sentiments are that rubber has fallen. So it will be difficult to convince the market," said A.S. Mehta, director-marketing at JK Tyre & Industries , which raised prices by up to 3% earlier this month.

Cheaper imports

A sharp fall in natural rubber prices in Thailand and Indonesia — from where India imports much of its rubber — has also prompted tyre makers to raise imports, since prices there are much cheaper than in India.

Ceat was now fulfilling nearly one-third of its total requirement of natural rubber through imports, Goenka said.

“We are consuming 6,000-7,000 tonnes natural rubber every month. Now, nearly 2,000 tonnes out of it is coming from imports," he said.

India’s natural rubber imports in June jumped 60% on year to 19,118 tonnes as tyre makers raised overseas purchases to cash in on lower prices in other Asian countries, and the trend is likely to continue in coming months.

“Tyre companies are aggressively importing block rubber. Despite 20 rupees duty it is cheaper than Indian rubber," George Valy, president of The Indian Rubber Dealers Federation, said.

India in December 2010 cut import duty on natural rubber to 20 per kg, from 20% earlier.

Little respite

Though rubber price have fallen over 12% from their peak, industry officials said they were not expecting a sharper fall in the second half of FY 12 as the demand-supply situation is still tight.

“I don’t think prices will correct sharply. Farmers are not willing to sell at lower levels. As soon as prices correct by 4-5 (per kg) they slash supplies in the market," Valy said.

India’s rubber output in the current financial year is estimated at 902,000 tonnes and consumption at 977,000 tonnes.

Besides, demand for tyres has slowed down from both original equipment manufacturers and replacement segments in the past few months, giving little room for tyre companies to hike prices.