“NR Price Rise has Cost Indian Tyre Industry 8.8 billion Rupees a Year”

(India/Rubber Asia) With annual consumption by the Indian tyre industry of over 400,000 tonnes of natural rubber (NR), “a price increase of just 1 a kilogram, imposes an annual financial burden of over 400 million rupees on us,” says Paras K Chowdhary, CMD of Ceat Tyres and chairman of Automotive Tyre Manufacturers Association (ATMA) of India.

The average price of NR has gone up from 39.17 rupees/kilo in 2002-03 to 63 rupees in 2005-06 (October) — an increase of 23 a kilo in about three years. This translates into about 8,800 million rupees annual financial burden on the Indian tyre makers, he said. (1$ = about 44 rupees).

Asked what price level of NR would the tyre sector consider as fair, he said: “No manufacturing sector would be happy with rise in raw material (RM) prices. This holds true particularly for any RM-intensive industry/sector like our’s.” However, he added: “so long as the price is cost plus reasonable profit or return on investment, the manufacturing sector would find it difficult to take exception to such a price rise. But when the price rise is unrelated to cost plus profit and is far higher, as in the case of NR, then it is only to be expected that the tyre industry would be seriously concerned at the development.”

On whether the increase in NR prices would lead to an increasing shift away from NR to synthetic rubber (SR) by the tyre industry, he said it was still too early to say.

“Substitution of or switchover from any principal RM has far-reaching technical, manufacturing and product quality and specification ramifications and cannot be linked to, or seen as a fallout of, price level itself. But if the NR price goes on escalating, resulting in a wide differential with the SR price, then we would seriously consider increasing our consumption of SR in place of NR,” the ATMA chief said.

He did not elaborate how such a switchover would be possible given his own reservations about all the ramifications of such a shift, but said this much: “It is for our technical departments to evaluate the feasibility of any such shift. But if switching results in any compromise on product performance attributes, no tyre maker would take the switching route”.

As for NR/SR imports, Mr Chowdhary said that “since the consumption pattern or ratio of NR and SR has not changed, import ratio of both rubbers has also remained unchanged.”

Asked if the government policies have been helpful in this regard, he said: “In the liberalised economic regime all that Government could do is to alleviate the financial burden on the consuming industry on account of the RM price increases by reducing the import duty (ID) on such raw materials. Now the import duty on tyre and SR is 15 per cent, but on NR it is 20 per cent.

“For encouraging value addition, many experts have said the ID on RMs should be lower than that on the finished product. Stretching this concept further, the ID on SR and NR should be 10. In any case, it is high time the Government removed the anomaly of an inverted duty structure.

Has the rubber price rise forced any cost-cutting exercises on the tyre industry?

“More and more industries and companies are benchmarking their respective cost, quality and performance levels with the best global practices and standards. Our industry is no exception. With de-licensing, the private sector could set up new plants and expand existing capacities without much hassle.

“This development coupled with free import policy has, in the recent past, led to increased competition within India for most products. In the export market the competition has always been fierce. So these developments have led many companies to adopt cost-cutting measures just to stay put, let alone make healthy profits.

“In the case of many companies cost is pared to the bone. Further, many have adopted cost reduction measures as a matter of routine. Naturally, when the going is tough or there is sudden spurt in costs, there is heightened activity on the cost reduction front,” he added.

Has the rubber price rise prompted, as in the case of some global tyre majors and even some latex processors, backward integration such as having own NR sources?

“Individual companies may go for it but this is not likely to be a trend. Moreover, having own NR plantations is a business decision/strategy which has to be evaluated from a long-term rather than a short or medium-term perspective,” the CEAT MD said.

Assuming the rubber price rise will stay for some time, would tyre makers go for alternatives to NR, if such an option is viable?

“It is difficult to make a prediction. Fundamentals do not support the present galloping price levels. But all sorts of predictions are being made by experts”.

How are tyre makers’ margins affected as OEMs generally don’t allow much leeway in terms of picking up the cost escalation in tyre industry inputs?

“Yes, for supplier industries it is hard to convince OEMs that cost escalation on inputs had to be transferred to output prices. But then this is a world-wide phenomenon and tyre makers have adapted, reluctantly, to this fact of life.”

What are the implications of the recently introduced VAT rules?

Some Indian states are yet to implement VAT. But even in states that have, there are teething troubles. So, it is too early to quantify the advantages on account of VAT. Yet, there is no doubt that VAT is a much better way of taxation than the ones it is replacing.

Excise Duty (ED) on tyres is 16 per cent. This is the mean rate. Hence it is doubtful if the Government would further cut ED on tyres in the next Union Budget.

Customs Duty (CD) on raw materials excluding NR is 15 per cent. On NR, this is again 20 per cent – another anomaly. The tyre industry has sought a lowering of customs duty on all raw materials, including NR, to 10 per cent – i.e. 5 points lower than the customs duty on the finished product.

But coming back to rubber price, Mr Chowdhary admitted that since the NR price rise was a global phenomenon, tyre makers in other countries were affected by it as much as their Indian counterparts.

But the steep price rise in NR would spur research activity on finding alternatives. “Intensive research is reportedly going on for producing SR akin to NR in physical and technical properties. So also experiments would be intensified in making alternatives to NR from guayule and sunflower. It is said that due to the high NR price levels, Indian makers of slippers are shifting to EVA, a kind of SR. Thus, industries consuming both NR and SR may attempt to switch over partly from both to new alternatives.”

Then the ATMA chief sounded a warning of sorts: When growers get used to the high prices, “they’d find it difficult to cope with reasonable prices.”

Also, very high prices would, he said, result in growers postponing replanting of trees. The good yield period from the trees could be over now. Yet because of the “extremely handsome” price, growers would even prefer low yield to felling the trees for replanting, “which means waiting for seven years for the tree to yield latex”.