Inflated natural rubber prices to puncture tyre maker margins: CRISIL

Tyre manufacturers in India are grappling with a significant rise in natural rubber prices, which have surged by more than 33% year-on-year in the first five months of the current fiscal year. This increase, driven by strong demand and constrained supply, threatens to put pressure on the profitability of tyre makers, who rely heavily on natural rubber as a key raw material.

In August 2024, domestic natural rubber prices averaged ₹238 per kilogram, a level not seen in over a decade. The last time prices exceeded ₹200/kg was in 2011, following the demand recovery after the Global Financial Crisis. At that time, natural rubber prices grew at a compound annual rate of 101% between 2008 and 2011. However, after the surge, prices remained subdued, staying below ₹150/kg on average for the next decade.

Since late 2023, prices have surged again, fuelled by a combination of supply constraints and steady demand from the automotive and other key industries. This current upcycle differs from previous ones, which were often triggered by isolated events. Pushan Sharma, Director of Research at Market Intelligence and Analytics, explained, "While past spikes were driven by events like farmer protests or labour shortages, this rise is rooted in fundamentals. Between 2011 and 2023, global production of natural rubber grew by 35%, while demand increased by 40%, leading to the current supply shortage and higher prices."

The sharp rise in natural rubber prices poses a significant challenge for tyre manufacturers, as the material accounts for 20-40% of a tyre's weight, depending on the type. The tyre industry consumes around 80% of India's natural rubber supply, making it highly vulnerable to price fluctuations. As a result, the margins of tyre original equipment manufacturers (OEMs) have a negative correlation with natural rubber prices.

In the first quarter of the current fiscal year, the operating margin of the top five Indian listed tyre manufacturers declined by approximately 200 basis points to 14%, compared to 16% in fiscal 2024, as natural rubber prices rose by 22% year-on-year. Mohit Adnani, Associate Director of Research at Market Intelligence and Analytics, noted, "With rising demand and restricted supply, natural rubber prices are expected to remain elevated, impacting tyre manufacturers' margins beyond fiscal 2025. The market deficit is likely to triple in 2024 as reduced tappable areas and lower yields further test the supply side."

While crude oil prices are expected to ease, lowering the cost of crude-based raw materials like styrene butadiene rubber, poly butadiene rubber, carbon black, and nylon tyre cord fabric, the rising cost of natural rubber is likely to increase CRISIL's Basic Tyre Raw Material Index by 4-6% this fiscal year, reversing a 5% decline last year.

In light of these challenges, tyre OEMs may need to explore strategies to mitigate the impact of the prolonged supply shortage, including sourcing alternative supplies or reducing costs through imports from more affordable destinations.