Soft crude price offsets rise in natural rubber cost for tyre companies1 min read . Updated: 17 Sep 2020, 10:37 PM IST
A dim outlook on the movement in crude oil prices bodes well for overall margins of tyre companies
International prices of natural rubber have risen 25% in the past three months, but tyre makers won’t be overly concerned as benign crude oil prices are expected to offset the impact of higher rubber prices.
For tyre manufacturers, natural rubber and crude derivatives account for around 45% each of the total raw material cost. Indian tyre companies import a large part of their natural rubber requirement from southeast Asia. Prices of international natural rubber rose in August because of high demand from China amid supply constraints, analysts said. The price of natural rubber in India also increased In line with the global trend.
On the other hand, global crude oil prices remain on a soft footing around $42 per barrel from around $60 a barrel in FY20. Carbon black, synthetic rubber, nylon tyre cord fabrics are crude derivatives used by tyre markers. Their prices follow the crude oil price with a lag of one-two quarters. A dim outlook on movement in crude oil prices bodes well for the margins of tyre companies.
“The earnings sensitivity to a decline in prices of crude derivatives is higher than the change in natural rubber prices. We believe any increase in natural rubber prices would be more than offset by a decline in crude oil prices favourably impacting gross margins by 150-200 basis points for tyre firms. Margins of all tyre companies were at multi-year highs in FY16-17 when crude was sub-$50 a barrel and natural rubber was sub- ₹135 per kg," JM Financial Institutional Securities Ltd analysts said in a report. One basis point is one hundredth of a percentage point. Natural rubber prices were at ₹133 a kg in early September.
Easing input cost is a positive, but a weak rupee plays a spoilsport here. Managements of Apollo Tyres Ltd and Ceat Ltd told analysts that the rupee’s depreciation could limit the gains from soft crude prices. “In the last 15 months, prices of tyres have remained steady. So, any slight increase in costs can easily be passed on to end-consumers, shielding margins in the near term," a report published by BOB Capital Markets in August noted.
The earnings also depend on how demand improves. For now, demand from the replacement market is helping offset part of the weakness in the original equipment manufacturers segment. However, overall demand is weak because of the pandemic.