Margins still tight in India despite lower rubber prices

The recent easing of rubber prices was understandably welcomed by tyre manufacturers, yet it represents no panacea for the industry; other costs, notably for energy, continue their upward trend. In India, these issues are accompanied by a weakening rupee. Financial daily the Business Standard reports that despite a 15 per cent fall in natural rubber prices, India’s tyre makers are facing ever tighter operating margins.

“Look at the cost of other items, which are soaring,” Satish Sharma, chief of India operations at Apollo Tyres told the Business Standard. ‘The power cost, which is about 60 per cent of the conversion cost, has gone up by 50-60 per cent. We are net importers and the devaluation of rupee has been significant. And, demand is not anything great; the plants are running nowhere close to full capacity, so there is additional cost involved. Margins have reduced from 16 per cent to seven per cent. Demand is very weak.”

Sharma also notes that, in the domestic market at least, Apollo faces restrictions in how it can combat such rising costs: “In the international markets, tyre companies raise prices by eight to 10 per cent in one go but doing this in India is not possible. There is no pricing power in our hands.”

Prices for natural rubber in India have dropped from their April high of Rs 240 a kilogram to Rs 200 (£2.36). The Business Standard notes that analysts believe the price may decline even further due to seasonal weak demand. However when it comes to imported rubber, the gains gleaned through slacker prices have been rubbed out by exchange rates. “From the peaks of Rs 240 a kilogram, prices have declined by 15 per cent and it would have gone down further, if it was not for the devaluation of the rupee,” commented Ceat Ltd. managing director Paras Chowdhary. “Rubber prices are still very robust. One should also see that the current prices are still 2.5 times higher than the low of the last three years, which was Rs 78 a kilogram. Margins will see some improvement from the January-March quarter because of the rubber price dip. Prices of other material such as synthetic rubber have also declined, which should help.”