The tyre companies might be having a good run in 2019 after all!
From worries of crude oil putting a brake to their dream run, the sector now seems to be sitting pretty pert. With crude oil also coming down and expected to be remain more or less capped, at least in the first half, tyre companies will have another reason to celebrate – falling rubber prices. If only demand for vehicles remained high!
Consumption of natural rubber, which accounts for 40-50% of the raw material cost for making tyres, is estimated to remain low due to expected lower economic growth, increasing trade war worries and very fluid geopolitical issues.
Jom Jacob, Senior Economist, Association of Natural Rubber Producing Countries (ANRPC) Kuala Lumpur, Malaysia, has stated that global consumption of rubber will increase at a much slower rate of 4.2% at 14.6 mtpa in 2019 v/s 5.2% in 2018.
The main consumer of rubber, China (who else??), which accounts for 40% of the global rubber consumption is expected to slowdown demand. And in India, demand is estimated to slow down to 4% in 2019; India accounts for 9% of world rubber consumption. In India, production of rubber fell 9.5% in 2018 due to the floods in Kerala, the main rubber producing state. Some 1.9 lakh hectares of untapped mature trees are expected to be tapped this year thus keeping the overall production intact.
Rubber is a cyclical trade. Rubber tree saplings take 7-10 years to mature after which a sticky, cream-like sap is used to produce tyres and other goods. Those in the industry say that major rubber producers will soon be unable to supply sufficient quantities of rubber to tyre factories in China and other importing countries because rubber saplings have not reached the right age for harvesting. Thailand, along with Indonesia and Malaysia, produce nearly 70% of the world’s natural rubber.
Those in the sector say that demand, world over for rubber is driven by heavy commercial vehicles and with that being soft, naturally, prices are down.
On one hand, there is expected to be low demand and on the other, supply is expected to increase – mainly on account of expansion of mature areas. Farmers, in 2012 had planted rubber ad –hoc, driven by high prices and growing demand. Now some of that will open up for tapping in 2019. Thailand, the largest rubber maker is expected to add some 2 lakh hectares in 2019 as plantations from seven years ago, will start giving yields.
Currently, the demand and supply are in balance but the moment prices show any indication of going up, rubber growers have the capacity to hike up production; this in turn means any possible price hike will be offset automatically.
If price of rubber remains around the same levels or climbs down further, the margins of tyre companies are expected to see a straight improvement of 10-13%. To boost volumes, companies might lower rates but they are sure to retain the lion’s share of the margin for themselves. H1FY19 could see direct benefits of the same.
Along with the lower rubber price, with the auto sector also doing pretty good, weak demand in China and the Govt bringing back the anti-dumping duty to fend off cheaper Chinese tyres, the overall outlook for the tyre sector looks robust.
Yes, the road ahead for tyre companies currently looks good, with a beautiful vista on the horizon.