Rising Natural Rubber Prices Impacting Tyre Manufacturers in India

Key Highlights:

• Natural rubber prices in India rose 33% year-on-year, averaging ₹238 per kilogram in August 2024, the highest in a decade.
• The increase stems from strong demand and limited supply, with the tyre industry using 80% of India's rubber.
• Tyre manufacturers face profit pressures, as natural rubber makes up 20-40% of a tyre's weight, leading to declining margins.
• Unlike past spikes from isolated events, this price rise is driven by supply and demand fundamentals.
• Tyre OEMs may need to find alternative sourcing or cut costs through imports to manage ongoing supply issues.

Tyre manufacturers in India are facing a tough situation as natural rubber prices have surged by over 33% in the first five months of the current fiscal year. 

This sharp increase, driven by strong demand and limited supply, is putting pressure on the profits of tyre makers who heavily depend on natural rubber as a crucial raw material.

Current Pricing Trends

In August 2024, the average price of domestic natural rubber reached ₹238 per kilogram, a level not seen in more than a decade. The last time prices crossed ₹200/kg was in 2011, after the demand recovery following the Global Financial Crisis. 

From 2008 to 2011, natural rubber prices grew at a rapid rate of 101% annually. However, prices stayed below ₹150/kg for the following ten years.

Causes of Price Surge

Since late 2023, natural rubber prices have risen again, influenced by ongoing supply issues and consistent demand from the automotive and other key industries. 

Pushan Sharma, Director of Research at Market Intelligence and Analytics, explained that unlike past price spikes triggered by isolated events, the current increase is based on fundamental supply and demand dynamics. 

He noted that between 2011 and 2023, global natural rubber production grew by 35%, while demand increased by 40%, leading to the current supply shortage.

Impact on Tyre Manufacturers

Natural rubber constitutes 20-40% of a tyre's weight, making tyre manufacturers particularly vulnerable to price changes. The tyre industry uses around 80% of India's natural rubber supply, meaning fluctuations can significantly affect profitability. 

In the first quarter of this fiscal year, the operating margin of the top five listed tyre manufacturers in India dropped by about 200 basis points to 14%, down from 16% in the previous fiscal year. 

Mohit Adnani, Associate Director of Research, noted that the rising demand and limited supply could keep natural rubber prices high, negatively impacting manufacturers' margins even beyond fiscal 2025.

Future Outlook

Although crude oil prices may decrease, lowering the cost of crude-based raw materials, the ongoing rise in natural rubber prices is projected to increase CRISIL's Basic Tyre Raw Material Index by 4-6% this fiscal year, reversing a 5% decline last year. 

To manage these challenges, tyre manufacturers might need to consider alternative supply sources or reduce costs through imports from cheaper markets.

Also Read: India's Tyre Industry Faces Natural Rubber Shortage

CMV360 Says

The surge in natural rubber prices highlights the importance of diversifying supply sources for tyre manufacturers. To remain competitive and maintain profitability, exploring alternative materials or suppliers is crucial. This proactive approach will help the industry navigate these challenging market conditions effectively.