As the economies across the globe are trying to rebound, demand for industrial commodities has spiked up rather swiftly. It has led to a sharp increase in commodity prices across the board.

According to the Trading Economics website, major industrial commodity prices have shot up in the range of 10-75% on a year-to-date (YTD) basis.

As of December 22, copper prices are up 24.77% YTD. Steel is up 18.71%, coal 20.94%, palladium 19.64%, aluminium 10.04% and iron ore 78.80%. Precious metals such as gold and silver have also seen a sharp surge in the international market. Both the commodity prices have gained by 22% and 41% respectively on a YTD basis.

As prices of steel, cement, aluminum, etc are rising, It has spoiled the math for many companies. The increasing cost of raw material threatens to derail the recovery momentum. We have seen the auto industry taking a price hike recently. Volatile commodity prices could also affect the infrastructure and construction sectors. As is the case, these sectors are struggling for long.

The domestic tyre industry, like several other sectors, is also at a receiving end. Over the past two quarters, international rubber prices have increased by 72%.

Why are rubber prices rising?

A report from Kotak Institutional Equities suggests that rubber prices are surging due to 1) high demand and 2) lower production.

As the global economy is trying to rebound, demand for all commodities, including rubber, has spiked up. On top of that, the muted activities at Thailand’s rubber plantations have affected the production of natural rubber. It has added pricing pressure for the commodity.

As per the report, natural rubber accounts for around 35% of the raw material cost of domestic tyre companies. Its elevated prices have increased raw material costs for domestic tyre companies. As a result, the tyre companies have taken a price increase of 1-3% in December.

What is the impact on the Indian tyre sector?

As the cost of natural rubber remains elevated, the government has imposed curbs on imports to protect the domestic industry. Out of the total imports of tyres, ~40% of imports are from China. The remaining imports are by MNCs from developed countries such as Spain, Japan, etc. The import restriction is likely to help domestic manufacturers to gain market share in the Passenger Car Radial (PCR) segment. This segment has the highest import mix (~14%) whereas, in Truck and Bus Radial (TBR) and two-wheelers, it is less than 3%.

How are Indian tyre companies adapting to these prices?

From a manufacturing standpoint, domestic tyre companies had taken up sharp capacity expansion in the last few years. These companies have increased their manufacturing capacities in Truck, Bus and Passenger Car categories.

The companies have also significantly increased their investment in research and development. The R&D efforts are being dedicated to (1) Achieve higher fuel efficiency, (2) Increase durability of tyres, and (3) Enhance wet grip. These initiatives will be helpful for companies to improve their tyre quality to match global standards.

These investments are yet to yield results for tyre companies due to the muted demand from auto manufacturers. As a result, the tyre companies have seen a sharp decline in their return ratios.

Closing comments:

The tyre industry is pinning its hope on the revival of the auto industry.

The pattern post lockdown has pointed at emerging green shoots in auto demand. The sustainability of this trend is critical for the tyre industry. It will lead to efficient utilization of facilities and improvement in their profitability