With the domestic automotive industry is witnessing a gradual recovery in 2014-15 following two years of demand slowdown, tyre demand is back on track, especially owing to traction in the two-wheeler space. Analysts expect exports to grow by 4-6 per cent for FY15, partly supported by imposition of anti-dumping duty by USA on Chinese tyres and thanks to low raw material costs.
According to a recent report on the sector by market research firm ICRA, “The recovery has been primarily supported by the two wheeler (2W) and medium and heavy commercial vehicle (M&HCV) segments while demand for tractors, light commercial vehicles (LCV) and mining and construction equipment (MCE) segments continue to remain weak. Buoyed by strong replacement demand, two-wheeler volumes grew by a strong 11 per cent year till date (YTD) December 2014.”
Performance of scooters was especially robust at 28 per cent while the high volume motorcycle segment reported a modest 5.5 per cent growth, the report added.
Improvement in freight rates, good replacement demand and a lower base have supported M&HCV sales growth (up 10.3 per cent YTD December 2014) while LCV segment continues to experience demand contraction (down 12.8 per cent YTD December 2014) affected by significant capacity additions over past few years and constrained financing environment amidst rising delinquencies.
The passenger vehicle (PV) segment saw a modest growth (up 3.7 per cent YTD December 2014) aided largely by replacement demand as demand arising from first-time buyers remained weak. “Tractor demand saw a higher than expected de-growth (-6 per cent YTD December 2014) and with the peak quarter of Q4 unlikely to bring fresh demand, we expect the segment to de-grow by a sharp 9-10 per cent for 2014-15,” it said.
Following a 2 per cent de-growth in 2012-13 and a muted 0-1 per cent growth in 2013-14, ICRAexpects the domestic tyre demand to grow by 6-8 per cent during 2014-15 driven by a 5-6 per cent growth in the OEM segment and 6-7 per cent growth in the replacement segment.
M&HCV, Scooters, Motorcycles and Passenger vehicles are likely to support the growth while negative growth is expected from tractor and LCVs segments. In tonnage terms, we expect a 3-4 per cent growth for 2014-15 due to the higher skew of product mix towards the smaller 2w, but higher tonnage growth is expected for 2015-16 contributed by M&HCV and MCE segments.
Following the postponements in 2013-14, tyre industry is witnessing strong capacity additions across segments as tyre makers prepare themselves to cash in the expected growth in auto industry. “We expect more capital investments in the industry supported by healthy cash accruals generated over last 1-2 years,” it said.
In a major development, in January 2015, the US Commerce Department’s International Trade Administration levied preliminary ADD on Chinese tyres in the US market – duty rates varying between 19.17per cent and 87.99per cent. Incidentally, Chinese tyre makers have been dumping stocks in India which has led to a 15per cent surge in tyre imports in H1, 2014-15. Representation from Automotive Tyre Manufacturers’ Association (ATMA) to the Government of India (GoI) continues towards increasing the customs duty on tyres from 10per cent at present to 20per cent as the industry remain affected by the inverted duty structure, ICRA said.
The growth in tyre exports has decelerated in the last two and half years due to the relatively subdued demand conditions in the overseas markets. For the period, April to November 2014, tyre exports (value) from India saw a modest 3.6per cent YoY growth; this follows a 7.3per cent YoY growth achieved in 2013-14 although this growth was primarily supported by the depreciating rupee. “Going forward, we expect the tyre exports to grow by 4-6per cent for 2014-15, partly supported by imposition of anti-dumping duty by USA on Chinese tyres,” the report added.
Domestic natural rubber (NR) prices have been declining in the last 18 months due to subdued tyre demand; however it continues to be at a 15-20per cent premium to global prices leading to a 26per cent YoY jump in NR imports during 9m 2014-15.
This coupled with the unfavourable realisations in domestic market has forced domestic rubber farmers to curtail production during the critical rubber tapping season. Although domestic NR production declined by 18per cent YoY during 9M, 2014-15, weak global prices led to a crash in domestic NR prices reaching lows of Rs 114 per kg in December 2014. However, the NR prices has since then moved up swiftly to Rs 130 per kg by end of December 2014.