The price of soft crude compensates for the increase in the cost of natural rubber

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International natural rubber prices have risen 25% in the past three months, but tire manufacturers won’t be too worried. Indeed, benign crude oil prices are expected to more than offset the impact of rising rubber prices.

For tire manufacturers, natural rubber and crude derivatives each account for about 45% of the total cost of raw materials. Indian tire manufacturers import a large part of their natural rubber needs from Southeast Asia. Analysts say international natural rubber prices rose in August due to strong demand from China amid supply constraints. In line with the global price trend, the price of natural rubber in India has also increased.

In contrast, global crude oil prices remain on a soft footing around $ 42 / barrel. From around $ 60 / barrel in FY2020, the price of crude oil has fallen significantly. Carbon black, synthetic rubber, nylon tire cord fabrics are crude derivatives used by tire markers. Their prices follow the price of crude oil with a lag of one to two quarters. The bleak outlook for crude oil prices bodes well for tire manufacturers’ margins.

“The sensitivity of earnings to a fall in the prices of crude derivatives is greater than the change in the prices of natural rubber. We believe that any increase in natural rubber prices would be more than offset by lower crude oil prices which would favorably impact gross margins by 150 to 200 basis points for tire manufacturers. The margins of all tire makers hit multi-year highs in FY16-17, when crude was below $ 50 / barrel and natural rubber was below Rs 135 / kg, “said JM Financial analysts said in a Sept. 14. One basis point is one hundredth of a percentage point Natural rubber prices were Rs133 / kg in early September.

Reducing the cost of inputs is an advantage, but a low rupee is a spoiler here. The management of Apollo Tires Ltd and Ceat Ltd told analysts that the depreciation of the rupee could limit gains from weak crude prices.

“Over the past 15 months, tire prices have remained stable. So any slight increase in costs can easily be passed on to end consumers, thus protecting short-term margins, ”said a report released by BOB Capital Markets Ltd in August.

Of course, overall income also depends on improving demand. For now, demand from the replacement market is helping to offset some of the weakness in the OEM (original equipment) segment; however, aggregate demand is low due to the pandemic.

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