According to a report by CRISIL Ratings, tyre manufacturers are bracing for a challenging period ahead as the price of natural rubber has surged by over 33% on a year-on-year basis during the first five months of the fiscal year. This increase is driven by robust demand coupled with limited supply. As of August, domestic natural rubber prices averaged Rs 238 per kilogram, a level significantly higher than the typical trends seen over the past decade.
The last time natural rubber prices surpassed the Rs 200 per kilogram mark was in 2011. At that time, the price hike was largely fueled by a recovery in demand following the Global Financial Crisis, bolstered by supportive policies from the US Federal Reserve and other major central banks. From 2008 to 2011, natural rubber prices experienced an impressive compound annual growth rate of 101%.
However, that three-year price surge was short-lived, and over the following decade, prices stabilized at an average below Rs 150 per kilogram. Since the end of 2023, however, the price of natural rubber has spiked once again. This time, the increase is attributed to strong demand from industries such as automotive manufacturing, alongside tight global supply.
CRISIL has noted that this particular upcycle is different from the previous ones. Pushan Sharma, Director of Research, Market Intelligence and Analytics at CRISIL Ratings, explained that unlike past price jumps triggered by isolated events, such as the 2016 farmer protests or the labor shortages caused by the 2020 pandemic, the current price rise is being driven by fundamental demand and supply factors.
“In 2011, the natural rubber market had ample supply to meet global demand. However, between fiscal years 2011 and 2023, global production only grew by 35%, while demand rose by 40%. This has created a supply crunch, which in turn is driving prices higher,” Sharma elaborated.
This supply-demand imbalance has significant consequences for tyre manufacturers, as natural rubber represents a key raw material, constituting 20-40% of a tyre’s weight depending on the category. The tyre industry accounts for nearly 80% of natural rubber consumption in India, making it particularly vulnerable to price fluctuations.
The profitability of tyre original equipment manufacturers (OEMs) is closely tied to natural rubber prices. For instance, in the first quarter of the current fiscal year, the operating margins of India’s top five publicly listed tyre manufacturers dropped by approximately 200 basis points to 14%, down from 16% in fiscal year 2024. This decline is a direct result of natural rubber prices rising 22% year-on-year.
Mohit Adnani, Associate Director of Research at CRISIL Ratings, highlighted that the ongoing demand growth and constrained supply are expected to keep natural rubber prices elevated, putting continued pressure on the margins of tyre manufacturers well into fiscal 2025. “The deficit in the natural rubber market is projected to triple in 2024, driven by a shrinking tappable area, declining yields, and a potential increase in demand, all of which will further strain the supply side,” Adnani stated.
While crude oil prices are anticipated to ease, leading to lower costs for crude-based raw materials such as styrene butadiene rubber, polybutadiene rubber, carbon black, and nylon tyre cord fabric, the rising cost of natural rubber is expected to push up CRISIL’s Basic Tyre Raw Material Index. This index, which tracks the prices of key commodities used in tyre production, is projected to rise by 4-6% this fiscal year, reversing a 5% decline in the previous fiscal year.
In this environment, tyre OEMs face mounting pressure to find strategies to mitigate the impact of prolonged supply shortages. Developing alternative sources of natural rubber or reducing costs by importing from more affordable markets may become necessary steps for manufacturers looking to navigate the current landscape.
