The increase in crude oil prices following the attack on Saudi refinery last weekend has turned out to be a double whammy for tyre manufacturers in India.
Even as production cuts announced by most of the original equipment manufacturers (OEM)s on account of prolonged slowdown have dented the business of tyre manufacturers, the increase in crude prices now is all set to increase the manufacturing costs. However, despite the input cost increase, it will be very difficult for tyre manufacturers to pass it on due to the slowdown, claim industry sources.
According to industry insiders, the tyre industry remains highly sensitive to the crude price movement with a lag period of about four to six weeks. Any upward movement in the crude price therefore reflects on its derivatives that form about 60 percent of the total manufacturing cost. The significance of the relation can be made from the fact that, on Monday when the crude prices spiked by about 20 percent – the highest increase since the 1991 invasion of Kuwait by Iraq – the stocks of most of the tyre companies tumbled on the Indian sensex. “The crude price increase has come at a difficult time. The demand for tyres, like all other vehicle components, is already at its lowest due to the slowdown and therefore any increase in input cost will surely make life tougher for us,” said an executive with a leading tyre manufacturing company.
Apollo Tyres, TVS Srichakra, Michelin, Ceat and Goodyear did not respond to Autocar Professional’s emails seeking an official response. An industry insider claims that the tyre companies generally keep a reserve of about 30-45 days and there is always a lag of about 1-2 months for the price to get passed. “The situation is being keenly watched by the tyre companies” said a Mumbai-based analyst from a leading consulting firm.
Sridhar V, partner, Grant Thornton India LLP, claims that the impact is expected to be short term, as things may get normalise in the coming weeks. “Tyre manufacturers will have to bear till then,” said Sridhar.
Industry observers are of opinion that the ongoing slowdown in domestic automotive industry, rising raw material prices and higher spend towards debt-funded capacity expansion is likely to weaken the financials of tyre companies in FY2020. According to K Srikumar, vice-president and co-head, Corporate Ratings, ICRA, the overall tyre industry in India will grow at a lower rate of 3-4% in FY2020. However, in comparison, the industry had grown by 12 percent and 14 percent in FY2018 and FY2019 respectively.
Further, domestic tyre demand is estimated to grow at a lower rate of 3-4% (volume) during FY2020 though it grew at 6.7 percent the previous year (PY). The replacement segment, which represents over 55% of industry volumes, is likely to grow by 5-6% in FY2020 (PY: 5.7%) while demand growth in the Original Equipment (OE) segment is pegged at lower levels of 2-3% (PY: 7.8%) affected by subdued vehicle production in FY2020. Beyond this, the domestic tyre demand is expected to grow by 6-8% during FY2020-24.
The industry is investing over Rs 17,000 crore over the next three years (ending FY2022), part of which is funded through debt.
Anti-dumping duty on Chinese tyres makes an impact
The government had on June 24, 2019 imposed countervailing duty (CVD) on import of new Chinese Truck and Bus radial (TBRs, including tubeless), for a period of five years effective from June 24, 2019. CVD in the range of 9.12% - 17.57% is levied on imported TBR tyres originating from China and exported through any country (including China), and TBR tyres exported from China irrespective of the place of origin. In September 2017, the government had re-imposed anti-dumping duty (ADD) on import of Chinese TBR tyres for five years, ranging between $245.35 and $452.33 per tonne (or) 9-15%.
ICRA claims that that this duty action will not have significant impact on tyre demand for domestic tyre manufacturers. This is because domestic TBR demand is currently not met by Chinese tyre imports, as was the case in the past.