Bottom Dropped Out of Loadstar Order Books, Says Chairman

Sales have decreased – substantially – for Sri Lanka based manufacturer of solid tyres, Loadstar. At a recent forum, company chairman Nihal Jinasena admitted that “the bottom has dropped out of our order books.” And further compounding Loadstar’s problems are the costly forward deals for raw materials the company is locked into.

“We were a company that was earning about 35 billion rupees (£222 million) and that has dropped hugely,” Sri Lanka’s Lanka Business Online reported Jinasena as saying. The Loadstar chairman did not comment on the percentage its annual revenue had dropped, however the picture he did paint of the company’s situation was sufficiently grim. “Earlier we used to reject 30 per cent to 40 per cent of orders we received because we could not keep pace with the orders. We just could not meet the demand,” he said. “Today the situation is entirely different. We accept anything that we can get.”

According to Jinasena, the company’s strength in the replacement tyre market is helping at present. Loadstar is now taking steps to adjust to the new situation, including reducing its inventory levels. “You have hugely expensive inventory which is geared to a certain level of production,” said Jinasena. “The level of production has dropped, so you can safely cut inventories…But this is easier said than done.”

Raw materials have dropped since reaching a peak in mid-2008, and during the time when prices were escalating Loadstar used derivatives to hedge or fix future prices in forward markets. “One of the things that we did when prices kept on climbing was we bought forward,” Jinasena said. “We bought forward in steel. We bought forward in synthetic rubber. And these prices when they suddenly tumbled left us with very, very, expensive raw materials, both in stock and coming in.”

Jinasena commented that steel prices fell from around $2,300 a tonne to around $1,000. Stuck with high material prices such as this, Loadstar has found it difficult to reduce prices of its finished products to the levels potential buyers expect. “We need to purge ourselves of these expensive raw materials that are in the system,” Jinasena said. “But because of the lower rate of consumption and the lower rate at which we are processing orders it would take even longer to purge ourselves of these expensive raw materials.”

A third factor impacting Loadstar’s business is the national currency, the rupee. As the Sri Lanka rupee is linked to the US dollar, recent exchange rate trends mean than prices for European customers are going up. This problem is compounded by Sri Lanka’s high rate of inflation, which necessitates increases in employee wages. Jinasena believes the rupee’s rising value and national inflation has had a “disastrous” effect on exporters.

“It is absolutely essential, and I make it clear to authorities and the government that a 15 to 20 per cent devaluation of the Sri Lanka rupee is absolutely essential for the export industry to survive,” stated Jinasena. Loadstar is now looking at possible means of bringing down costs, reducing capital expenditure and cutting bank borrowings. However the company chairman says that laying off workers is not an option, partly because of Sri Lankan labour laws, and partly because of the company’s philosophy.

“The worker has done nothing wrong,” said Jinasena. “He has in no way contributed to the problems in your company.” Furthermore, he commented, if workers are removed from the workforce, the number of consumers in a market also will fall, and the economic downturn would gain further momentum. Instead, Loadstar is using the economic crisis as an opportunity to re-examine its production practices and boost productivity.

“What gives us so little reason for comfort is that there is no end in sight for this crisis,” was Jinasena’s grim conclusion. “We do not know when it is likely to end.”