- Wealth PMS
Rubber prices are falling. Synthetic rubber, which is produced using petroleum is similar to natural rubber. With the recent rise in petroleum prices, low production of rubber coupled with unfavorable weather had given a strong uplift to rubber prices.
From the low of $30/barrel when the crude oil prices rose to $50/barrel, synthetic rubber prices also firmed up and showed an upward trajectory. Natural rubber prices were supported by the lean production and increase of imports from China.
Lately this trend has reversed due to the start of rubber production season and weakening of global demand. Natural Rubber production mainly starts in the months of September as the harnessing of rubber starts in this period. The fall in domestic prices was supported by downtrend shown in international spot prices of the rubber.
The prices fell from its high of Rs.144/Kg in Aug first week to a five month low of Rs.125/Kg as on today, 6th September.
For India, 53.59% of the consumption demand has been met via imports. Indonesia (212293 metric tonnes) and Thailand (112006 metric tonnes) together accounted for 70.74% of total imports (458374 metric tonnes) of natural rubber to India for the year FY16.
Auto tyre manufacturers are the major consumers in India for natural and synthetic Rubber. Tyre manufacturers constituted 67.62% of the total rubber consumption in India for the month of May.
Until last quarter, rising rubber prices had taken a toll on the profits of the tyre companies. Rubber is a major raw material for the tyre companies, and the upmove had been a worrying factor for the tyre industry. At the start of the financial year, rubber prices soared from Rs90/Kg to a peak of Rs144/kg, hurting tyre industry growth.
But that’s changed. Rubber prices have fallen by almost 13% from the last month. This might improve the operating margin of the tyre manufactures and in turn improve their profitability.
Since last month, tyre companies have seen an unexpected rally on. Most of the tyre companies have returned 6% on the equity in last one month. JK Tyre ended up returning 43.78% in one month!.
One major negative is, of course, for rubber farmers in Kerala, who make natural rubber, for whom the price changes are a mess. There should however be the ability to “hedge” these prices, but the financial literacy and ability to pay margins is suspect, at least among these farmers. For tyre companies, though, who are more sophisticated, it appears they don’t hedge much either – because otherwise their margins wouldn’t change. Perhaps now commodity markets are less about users and more about traders.
Data Source: rubberboard.org.in; Charts: http://snap.capitalmind.in/
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Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.