Tyre stocks have been making the news in India after the floods in the southern state of Kerala. Shares of industry majors like Apollo Tyres, JK Tyre, MRF and Goodyear are down by 10% so far, according to analyst Moneycontrol that also says the impact of reduced supply of rubber, a key raw material for tyres, will impact the firms.
Having said that, experts believe that the impact of the grim situation is likely to be short term and investors may want to focus on the long term growth story in case of tyre companies.
Meanwhile, prices of natural rubber in the Indian market have remained firm in the past couple of months. Heavy rains and floods in Kerala are expected to lend further support to domestic prices. But the bearishness in the international market will put some pressure on prices.
Rubber prices were quite volatile in the first few months of the year. In the beginning of the year, rubber was trading at Rs138 per kg in the National Multi Commodity Market. In the Tokyo Commodity Exchange (TOCOM), rubber was trading at 216 yen a kg in January as the Shanghai futures rose ahead of the Chinese Lunar New Year. But by February prices slipped to 179 yen a kg as the market started turning bearish, said Veeresh Hiremath, Head of Research, Karvy Commodities.
Corrections in the crude oil prices also affected the natural rubber prices, as synthetic rubber is a derivative of crude oil.
According to the Association of Natural Rubber Producing Countries (ANRPC) estimates, global output of natural rubber will rise 6.1% to 14.2 million tonnes this year and global demand might grow only 2.8% to 13.3 million tonnes. Thus, the supply-demand equation does not support any upside in prices. TOCOM prices fell to this year’s lowest of 163.8 yen a kg last week.
Indian rubber prices, which fell to the low of Rs 117 per kg in March under the influence of global cues, however, started moving up and touched Rs 129 a kg by end of July. After the summer, production had not picked up as rains started lashing rubber-growing areas of Kerala. The supply started dwindling and increased the gap with demand.
Natural rubber production hit six-year low of 126,000 tonnes in the June quarter while consumption stood at the highest level at 302,000 tonnes. The production-consumption gap widened to 58% in the June quarter from 46% in the year ago period. Production contracted by 12% as consumption went up by 14%.
Consequently, the tyre industry started complaining about high import duties, which were curbing supply from abroad. “Rubber import is imperative to meet the huge demand supply gap. But supplies are being squeezed in view of a restrictive policy environment. The customs duty on import of rubber is 25%.
Moreover, the tyre industry needs to adhere to pre-import condition for natural rubber import against the tyre export obligation. Further export obligation period for tyres has been reduced from 18 months to 6 months making it tough for the industry,” said Rajiv Budhraja, director general of ATMA.