Results for the September quarter were a non-event for tyre companies. While these companies were putting together the financials for the period, natural rubber price in the country (RSS-4 grade) shot up sharply beyond the quarter’s average price of around Rs165 a kg. By mid-October, it jumped to Rs190 per kg and climbed further to the present level of around Rs202 per kg. This is around 22% higher than last quarter’s average price. The fact that rubber costs account for almost half of the total cost of producing a tyre means that profit margins of these firms will be squeezed.

Graphics by Yogesh Kumar/Mint

The surge in prices is not a recent short-term aberration either. Rubber prices have risen by as much as 150% in the past two years, from levels of Rs76/kg in November 2008.

International prices, too, have shot up in a similar fashion, giving no opportunity for companies to import at lower costs. Reports suggest that the price in Thailand—the world’s largest rubber producing nation—at around $4.3 (Rs196) a kg, has not only tripled since early 2009, but also surpassed the peak of 1952, when fears of Korean war triggered panic buying.

Prices are rising because of a demand-supply gap. Officials at the Rubber Board of India say that incessant rains hit supply this season. While the cultivation acreage is increasing, it would not be before 2012-13 that the new plantations would add to production. According to estimates by the Rubber Board, India’s rubber production is expected to increase by 9% to 890,000 tonnes in 2010. But demand, supported by the auto boom and high consumerism, would be higher at around 970,000 tonnes, according to industry experts. This gap in supply is expected to keep prices buoyant.

Globally, too, rains played havoc, resulting in lower production in three of the world’s largest rubber producing nations—Thailand, Indonesia and Malaysia. And this comes at a time when rubber inventories are at the year’s low in China.

Like global tyre firms, Indian companies have taken price increases to offset the impact of higher rubber prices. Leading tyre makers such as Apollo Tyres Ltd, MRF Ltd, Ceat Ltd and JK Tyre and Industries Ltd have increased tyre prices by 12-15% in the last one year.

Yet, as the chart indicates, all tyre makers have seen profitability steadily declining in the last four quarters. And this also despite increasing volumes, thanks to the boom in the auto sector. The reason is that raw material cost increases continue to surpass the hike in tyre prices. Apollo’s operating margin fell to 10.3% last quarter, down from 16.4% a year ago, while MRF’s margins fell by 690 basis points to 9.8%. Smaller firms were worse off; Ceat and JK Tyres reported wafer-thin margins of 4% and 6.2%, respectively.

Surjit Arora, an analyst at Prabhudas Lilladher Pvt. Ltd, says that tyre firms may see no respite in profit margins in the next two quarters, unless rubber prices soften. They would have to increase tyre prices by at least 3-6% to sustain the present profit margins.

Shares of all tyre makers have reacted adversely since the first quarter of fiscal 2011, due to fall in profitability and the grim outlook in the near term. Barring MRF, where strong management and low-liquidity support the share price and which rose 16% amidst these adversities, shares of Apollo, Ceat and JK fell by 6%, 10% and 27% from 1 April till date. But strong volumes and revenue momentum could turn the fortunes sharply if the key raw material gives respite.

We welcome your comments at