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Rubber prices slide globally! Stocks get re-rated…
In the recent past, global rubber prices have gone into a downward spiral
with increasing concerns on demand-supply mismatch. The benchmark
Bangkok RSS-4 rubber prices have declined from $2.2/kg in March to
~$1.7 levels. These are five-year low prices. Recent news flow of sale of
200,000 MT of rubber stocks by the Thailand government has caused
more panic in the existing market. On the demand side, global studies
and major manufacturers commentary suggests automotive tyre demand
will grow ~4-5% in volume terms. This would be split with demand
rising well in the North American region while Europe and Japan would
remain sluggish. Emerging markets like India and China are expected to
see a moderate recovery.
From an Indian perspective, domestic tyre manufacturers saw another
quarter of favourable raw material prices mostly as natural rubber (NR)
prices saw a decline to | 132/kg from | 148/kg in March in the domestic
market. Domestic rubber supplies would have ebbed in the monsoon
season, however, due to lower tapping. However, in the coming periods,
as tapping increases prices could remain under pressure as supply
increases domestically. The recent crude price decline (~9% QoQ) may
cause a lag decline in crude linked derivatives like synthetic rubber and
nylon tyre cord. Rubber contributes ~50% in volume terms and ~55% of
the total raw material cost for tyre companies, depending on the product
mix. Crude-linked derivatives constitute another 20-25% of the raw
material basket for tyre companies. Thus, tyre makers are in a unique
sweet spot as commodity prices, unlike historically, are reducing without
a demand collapse. Hence, this is providing companies opportunities to
focus more on bottomline growth vis-à-vis pace of topline growth.
Sector outlook
Raw material outlook: Rubber price fall in a traditionally weak quarter
(Q1) augurs well for OEMs as risk of price increases come down
significantly for the rest of FY15E. The increase in domestic tapping from
the Kerala region and increase in global supplies as Thailand inventory
comes into the market may keep prices under control. Going ahead, we
believe RSS-4 prices would continue to remain at ~$1.8/kg (Bangkok),
~| 135/kg in the domestic market. On the crude linked derivatives side,
like synthetic rubber/carbon black prices are also expected to witness
declines albeit in a lagged manner owing to the recent fall in Brent crude
prices to below $100/bbl.
Pricing discipline: On the pricing front, so far, even with the slowdown
and natural rubber price corrections, the pricing discipline shown by the
tyre industry in the replacement market has been strong. On the OEM
side, the pricing contracts are on a quarterly or bi-annual basis, thereby
resulting in price reductions in the OEM segment as the benefit of
favourable raw material prices gets passed on. Thus, the increase in
OEM demand would have led to higher utilisation levels but would be
offset by a decline in terms of pricing.
Demand outlook: Demand recovery is showing some green shoots of
revival with the M&HCV, PV (-4%, ~3% YoY YTD growth) OEM sales
showing sings of revival even as the 2-W segment continues to remain
strong (~16% YTD YoY growth). This augurs well for FY15E, FY16E. The
pick-up in tyre demand from OEs may be more pronounced from
H2FY15E onwards. We expect the overall auto industry to grow 9-11%
for FY15E. Replacement demand has mitigated the overall weakness in
OE demand in FY14E. We believe overall industry share of replacement,
OEM would move to 65%, 35% from ~70%, 30%, respectively
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
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Rubber prices slide globally! Stocks get re-rated…
In the recent past, global rubber prices have gone into a downward spiral
with increasing concerns on demand-supply mismatch. The benchmark
Bangkok RSS-4 rubber prices have declined from $2.2/kg in March to
~$1.7 levels. These are five-year low prices. Recent news flow of sale of
200,000 MT of rubber stocks by the Thailand government has caused
more panic in the existing market. On the demand side, global studies
and major manufacturers commentary suggests automotive tyre demand
will grow ~4-5% in volume terms. This would be split with demand
rising well in the North American region while Europe and Japan would
remain sluggish. Emerging markets like India and China are expected to
see a moderate recovery.
From an Indian perspective, domestic tyre manufacturers saw another
quarter of favourable raw material prices mostly as natural rubber (NR)
prices saw a decline to | 132/kg from | 148/kg in March in the domestic
market. Domestic rubber supplies would have ebbed in the monsoon
season, however, due to lower tapping. However, in the coming periods,
as tapping increases prices could remain under pressure as supply
increases domestically. The recent crude price decline (~9% QoQ) may
cause a lag decline in crude linked derivatives like synthetic rubber and
nylon tyre cord. Rubber contributes ~50% in volume terms and ~55% of
the total raw material cost for tyre companies, depending on the product
mix. Crude-linked derivatives constitute another 20-25% of the raw
material basket for tyre companies. Thus, tyre makers are in a unique
sweet spot as commodity prices, unlike historically, are reducing without
a demand collapse. Hence, this is providing companies opportunities to
focus more on bottomline growth vis-à-vis pace of topline growth.
Sector outlook
Raw material outlook: Rubber price fall in a traditionally weak quarter
(Q1) augurs well for OEMs as risk of price increases come down
significantly for the rest of FY15E. The increase in domestic tapping from
the Kerala region and increase in global supplies as Thailand inventory
comes into the market may keep prices under control. Going ahead, we
believe RSS-4 prices would continue to remain at ~$1.8/kg (Bangkok),
~| 135/kg in the domestic market. On the crude linked derivatives side,
like synthetic rubber/carbon black prices are also expected to witness
declines albeit in a lagged manner owing to the recent fall in Brent crude
prices to below $100/bbl.
Pricing discipline: On the pricing front, so far, even with the slowdown
and natural rubber price corrections, the pricing discipline shown by the
tyre industry in the replacement market has been strong. On the OEM
side, the pricing contracts are on a quarterly or bi-annual basis, thereby
resulting in price reductions in the OEM segment as the benefit of
favourable raw material prices gets passed on. Thus, the increase in
OEM demand would have led to higher utilisation levels but would be
offset by a decline in terms of pricing.
Demand outlook: Demand recovery is showing some green shoots of
revival with the M&HCV, PV (-4%, ~3% YoY YTD growth) OEM sales
showing sings of revival even as the 2-W segment continues to remain
strong (~16% YTD YoY growth). This augurs well for FY15E, FY16E. The
pick-up in tyre demand from OEs may be more pronounced from
H2FY15E onwards. We expect the overall auto industry to grow 9-11%
for FY15E. Replacement demand has mitigated the overall weakness in
OE demand in FY14E. We believe overall industry share of replacement,
OEM would move to 65%, 35% from ~70%, 30%, respectively
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
LINK:
http://content.icicidirect.com/mailimages/IDirect_Tyre_SectorUpdate_September2014.pdf
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