Brent crude was $73 per barrel on December 13, 2023. The oil benchmark gained 20% by March 19, 2024. Geo-political tensions such as the recent Ukraine drone attack on Russian facilities and economic uncertainties have increased crude oil prices over the past few months. After touching $88 per barrel on March 19, 2024, Brent crude is currently at $85 per barrel, but might cross $95 per barrel in 2024. This is not good news for oil guzzling economies like India. With rise in crude prices, Indian tyre companies are witnessing downtrend in their stock prices. All major tyre companies such as MRF, Apollo tyres, Ceat, JK Tyres & Industries stock prices have fallen since March 4, 2024.
All these companies reported operating margin contraction in Q3FY24. Volatile crude prices, rising rubber prices and Red sea disruption leading to increased charges and higher lead time are expected to impact operating margins in the near future.
Crude and its derivatives constitute 40-50% of the cost of tyre production. Companies generally keep cover for such raw materials with high price volatility. For instance, Ceat maintains two months cover with respect to crude and its derivatives feed stock. Another set of raw material is the rubber category which includes natural rubber and synthetic rubber. Synthetic rubber production requires chemicals derived from crude oil. While synthetic rubber prices are rising with increase in crude prices, natural rubber prices are also on an upward trajectory. Natural rubber prices are up due to supply shortages as major rubber exporting countries such as Thailand and Malaysia are facing adverse weather conditions. Average rubber prices were at Rs 150/kg levels in 2023 down 9-10% from 2022. Presently, rubber prices are at Rs 180 levels in March 2024.Rise in raw material prices is going to impact operating margins of the Indian tyre sector in the near future.
The price trajectory of crude and rubber prices is uncertain. Tyre companies should be ready to raise product prices to maintain their margins and profitability.
