Rubber prices are going up. And it’s causing some tension. The tyre industry is worried, says ET, about prices rising after a year of record low prices.
Benchmark rubber futures in Tokyo Commodity Exchange has risen nearly 5 per cent to 204 Japanese yen per kg in the past two days. Crude oil prices also gained nearly 8 per cent in the last five trading session. Increase in crude oil prices also keep the prices of synthetic rubber and other chemicals higher, said analysts.
The longer story is that world supplies have increased dramatically, and that has caused a worldwide depression in rubber prices as the demand from China ebbed.
Benchmark rubber prices slid to a five-year low in October in Tokyo as trees planted in Asia over the past decade matured and flooded the market just as the Chinese economy slowed. Producers including Indonesia and Thailand, the world’s biggest exporter, are seeking to stem the decline by restricting shipments and reducing growing areas.
…
An expansion of plantations across Southeast Asia from 2004 to 2011 caused a supply surplus from 2011 through 2016, according to the Singapore-based International Rubber Study Group. The glut is poised to drop to 51,000 tonnes next year from 77,000 tonnes in 2015, it said in January.
To counter the price falls, large producers are now reworking their long term pricing contracts. Earlier, prices would be set according to long term futures prices traded on an exchange – however, as the exchange prices are very low, the producers have decided instead that they’ll price it higher and “ditch” exchange based settlements. This is exactly how it should be done – if you don’t want to sell your stuff at a price, you don’t sell it, cut supply and let the prices increase.
Big Asian rubber producers, including world No. 1 Sri Trang Agro-Industry Plc, said they plan to hike prices sharply, ditching a system of pegging them near the benchmark set by the Singapore SICOM exchange.
The producers are set to charge a significant premium over the exchange-traded futures contract from the second half of 2015, a move that marks a radical change in an industry where plummeting prices have hit farmers badly.
In India, Kerala is India’s largest rubber producing state and has been hurt badly because of a) lowered prices due to imports and b) drop in prices of synthetic rubber due to drop in crude prices. There, politicians have decided to go another way – to increase import duties to as much as 70%, and to even have the government buy rubber directly from farmers at higher prices! (Manorama)
hough a formula devised in a meeting of stakeholders chaired by Chief Minister Oommen Chandy raised the hopes of the rubber planters and merchants, in effect the price the growers received was lowered by Rs 8 to Rs 12 per kilo. Even the procurement policies of the government have not helped the growers.
These programmes will become effective only when government agencies directly procure rubber, the federation’s office-bearers said. People’s representatives from Kerala should exert pressure on the central government to do so with the Rs 860 crore under its price stability fund. Import duty should be raised to 70 percent as latex is considered an agricultural produce, they demanded.
The recent rise in prices isn’t all that great, really, considering they went up from Rs. 90 a kilo to about Rs. 120 per kilo on average. This is still less than substantially lower than earlier.
Domestic players in the tyre industry, like Ceat, MRF and Apollo Tyres have fallen, but that could also be because the broad market has fallen considerably. Profits for the December quarter saw a big increase for nearly everyone:
- CEAT profits up 33%
- MRF profits up 80%
- JK Tyres doubled profits
- Only Apollo Tyres saw a 40% drop in profit.
The Outlook
For Indian tyre producers, an increase in input duties will hurt. In what could be a double-whammy, an increase in international prices could hit too. Rubber prices and crude prices (for synthetic rubber as an alternative) will remain key to the future prospects of tyre companies.
In the medium term, tyres are a regular replacement concept – you may not buy a new car, but you have to change your tyres every few years. Automakers are starting to see an improvement in sales so tyre manufacturers will piggyback on that as an additional rise. But their margins will be crimped over the next year, should prices of rubber continue to go up.
If rubber supply is crimped due to lower production or deal making by rubber companies, or by natural decrease in availability next year, we might see the recent low in prices as something that will not sustain. Recovery in demand with lower supply means only one things for the rubber market: higher prices. And that means lower margins for tyre producers going forward.
Subscribe to Capital Mind:
To subscribe to new posts by email, once a day, delivered to your Inbox:
[wysija_form id=”1″]
Also, do check out Capital Mind Premium , where we provide high quality analysis on macro, fixed income and stocks. Also see our portfolio which has given stellar returns in our year, trade by trade as we progress. Take a 30-day trial:
[wysija_form id=”2″]
