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What is the outlook for tyre prices?

September 11, 2006 16:25 IST

Rubber prices have fallen globally by 20% from record highs. 10% of the tyre sector is likely to have already shifted to synthetic rubber. This shift to synthetic rubber by Indian tyre companies could affect tyre prices.

Arun Bajoria, president at JK Tyres, and Philip Eapen, ED-marketing at MRF, give their views on the outlook for tyre prices, going forward.

Arun Bajoria believes that the fall in rubber prices is a positive sign. He further informs that there is no let-up in prices of carbon black or synthetic rubber and the other inputs like chemicals and butyl.

According to Philip Eapen, the industry is concerned about the volatility in prices. He also adds that they are on a wafer thin margin of profitability, which is not good for the industry. Eapen believes that there has to be a better profitability for the tyre industry, not only from the replacement factor, but also from OE (Original Equipment). Only then, the industry can prosper and be on par with the rest of the industries in the world.

Excerpts from CNBC-TV18's exclusive interview with Arun Bajoria & Philip Eapen:

What is the trend that you have seen in rubber prices in the past month or so and how much of a drop has it been?

Bajoria: Rubber prices certainly have come down and this is a positive sign. However, there is no let-up in prices of carbon black or synthetic rubber and the other inputs like chemicals and butyl. So really speaking, rubber prices have come down by Rs 15-20.

But on the other hand, we are already seeing signs of synthetic rubber prices inching upwards again.

Even when oil prices are falling, do you see that continuing or will lower oil prices have a bearish effect on that as well?

Bajoria: In the last two years, rubber prices have gone up by almost 49%, this is over '03-'04 and

'04-'05. So we have to still watch for a little longer period and only then we can take a view.

How do you read the drop in rubber prices? Earlier, you were not very hopeful of rubber prices falling in this quarter? In fact, you were looking at rubber prices moving up. What led to the fall in rubber prices and what kind of impact are you seeing on your margins?

Eapen: When we talk about these prices, we must have some kind of a benchmark in order to really appreciate what it is doing to the cost of a tyre. If one looks at the prices that have come down today, which I believe, is around Rs 84-85, it is still above Rs 22 more than what we were paying last year.

Last year, we were paying around Rs 60-70. But there has been no time in living memory when rubber price have shot up so high in such a short time. So we are talking of a very high increase.

And it has come down from that peak, from Rs 120 to Rs 85, forgetting the fact that we are still operating at about Rs 22/kg more than what it was last year.

So from that perspective, first of all the rubber prices and of course what Mr Bajoria has said about the other petroleum derivatives are very true. These are also on the rise and therefore, one has to see this whole thing in totality to understand the situation. The worse part is that there seems to be no stability on these prices.

The volatility of the raw material prices is what we are concerned about because we cannot take a precise view of where we should be in prices

because we have seen them moving up and down so rapidly. So this is a new trend which we are trying to grapple with.

Last time we spoke to you, you said that to come back to your previous margins of last year, you would need to increase tyre prices by about 6%. You said that would be difficult because manufacturers are still digesting earlier hikes in tyre prices.

Eapen: I was talking about rubber at that time. But I must tell you, first of all, if one looks at the margins of the tyre company, one would see that they are far less than of any other industry in this country.

Traditionally, we are on a wafer thin margin of profitability, which is not good for any industry. It is not good for the customers in the long term, even the industry doesn't make reasonable profits because they will not develop, they will not put money back into the operations and expand capacities and so on.

There has to be a better profitability for the tyre industry, not only from the replacement factor, even from the OE (Original Equipment). Only then, the industry can prosper and be on par with the rest of the industries in the world.

Will you see any impact on your margins because of this fall in rubber prices? And if not, will you extend that with the price increase?

Bajoria: Mr Eapen has very rightly pointed out about this wafer thin profitability in the tyre industry. We are supplying to the replacement market, which means to the vehicles and on the other side, to the OE manufacturers, who are the vehicle manufacturers.

If one takes their margins, the operating margin of a vehicle manufacturer, it is 13-14% today. If one takes the raw material supplier, who supplies raw material to us, his margin is 18-19%.

In terms of an auto ancillary manufacturer, who is completely related to us, then his margins is also 19%. Now if one takes the tyre manufacturers per se, our margins are hovering between 6-7% depending on the tyre company.

About 6-7 years ago, our profitability was also 12-13%. This is a very important factor and the net profit of a vehicle manufacturer today is 8-9%. The raw material manufacturer, who supplies raw material is operating around 10% net profit, for the auto ancillary, it is around 9-10% and for a tyre manufacturer, the net profit is not even 1%; in fact it is between 0.9-1.1%.

Have your customers seen the logic of this because this is really something that they should? Are they willing to accept higher prices now?

Bajoria: The thing is that no end user or customer likes a price increase. When one wants to give a price increase or when one wants to buy something at a higher price, they come up with all kind of excuses and all reasons that tyre manufacturers are being very unreasonable.

So with net results within the next quarter, are you hoping to increase prices? Are you hoping to see an uptick in margins or is it negative for both?

Bajoria: As Mr Eapen and I said, there is so much of fluctuation and volatility and except for one particular item, which is natural rubber, it touched Rs 115-116. Now it is hovering around Rs 85.

But natural rubber is only 38-39% by value. We have to look at the whole picture. What about the balance 62%?

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