Rising rubber rates may force tyre-makers hand

The Rs 12,000 crore tyre Indian industry is bracing for yet another price hike, following a steep increase in the price of domestic natural rubber.

Price of natural rubber in the Kochi (Kerala), spot market, in the last three weeks, has shot up to Rs 64 a kg from an average price of Rs 52 a kg in March 2005.

The next round of price hike that is expected to he effected in the second quarter of this financial year, comes close on heels to the average price hike of four per cent effected across the industry in April 2005. Sources in the industry confirmed that hike is likely to take effect only after June 2005.

Steep increase in price of natural rubber has been an area of concern for tyre companies. In the last three years, average price of natural rubber had sky-rocketed from Rs 39.62 per kg in 2002-03 to Rs 55.5 per kg in 2003-04 to Rs 56.11 in 2004-05.

The fact that raw materials account for 70 per cent of the cost of producing tyres adds pressure on bottomline for tyre manufacturers. Petroleum-based inputs like nylon fibre and carbon black, two other significant inputs for tyres, have witnessed price increase too.

"The prices of natural rubber this time has shot up due to a slight delay in the arrival of monsoon in Kerala. Though this need not have resulted in a price increase, it has managed to do so due to speculations," said Apollo Tyres' chief of strategy and business operations, Sunam Sarkar said.

The seven major players in the domestic tyre industry are watching each other avoiding to make the first move this time around. It is also learnt that Apollo Tyres is likely to make this first move in the next round of price hike.

Sarkar said, "In the last two years, there were 6 to 7 price hikes the industry had to effect, leading to an aggregate hike of 10-11 per cent. In most of the cases, we had to make the first move." He however did not specify that this time around the price hike will first come from Apollo Tyres.

Paras Chowdary, president of All India Tyre Manufacturers' Association said, said that only the market leaders can make the first move in this direction, but are wary about losing market share in the short or medium term.

Chennai-based tyre major MRF is also considering a price hike but is not sure about the timing. MRF's executive director, marketing, Philip Eapen said, "We all buy rubber from the same market. Hence what is applicable to one holds good for the rest. But we are working out the details (on when to increase the price and by how much)."

The industry is also not sure about how much of price hike the end user, both in the OE (automobile manufacturers) and replacement market, will take.

While price hike for the OE customers can be effected through negotiations, the hike in the replacement market will have to be timed more carefully to avoid any backfire.

Chowdary who is also the managing director of Mumbai based Ceat Ltd said, "We have asked for an eight per cent hike from our OE customers. Though that will not fully compensate for our cost increase it will help us deal with the issue for now."

An estimated 20-25 per cent of the tyres sold in the country (in value terms) is for the OE or automobile manufacturers and the rest goes to the retail or replacement market.