Tyre Price May Increase

In reaction to spike in raw material costs in previous quarter (Q4FY24), which was caused by increase in price of natural rubber & depreciation of rupee against US dollar, tire makers Ceat & Apollo Tyres plan to raise prices, according to officials. 

Tyre Material Price So Far

Prices for natural rubber have increased dramatically, & just one month ago, rupee was worth 83. Five months later, it was worth 83.5 versus US dollar. Growing cost of crude derivatives, which include nylon fabric & synthetic rubber & are essential to manufacture of tires, is exacerbating this trend. Over last five months, price of natural rubber has increased from ₹150 to ₹180 per kilogram, while cost of its crude derivatives, such as synthetic rubber & nylon fabric, has also increased.

Cost Escalation Management

Progressive pricing is only way we can reduce cost escalation of raw materials.
We must handle inventory strategic procurement in this manner. These steps will, however, have their limitations," he stated.

Possesses Apollo Tyres sought to counteract negative effects of growing raw material costs on its profitability by announcing 3% price increase in replacement market this quarter.
Tire manufacturers' profits have also been harmed by Extended Producer Responsibility (EPR) regulations implementation. According to these requirements, businesses must obtain certificates from authorized recyclers in order to comply with particular waste tire recycling targets.

Which Stocks could get affected? 

1. Profits have been impacted, according to Apollo Tyres, Ceat, & MRF, by provisioning needed to meet EPR requirements.
2. Another large tire company, MRF, saw decline in earnings in fourth quarter as compared to prior year.
3. Higher sales & cheaper raw material costs in preceding quarters were causes of this growth.
4. A 145 crore provision made in most recent quarter to comply with EPR standards had effect on MRF's profits.
5. To meet EPR requirements, Ceat has set aside ₹107 crore, some of which is from previous fiscal year.
 

Following stock names could be affected by increase in tire prices due to rising raw material costs & impact of Extended Producer Responsibility (EPR) regulations:

1. Ceat

As of 21-5-24

2. Apollo Tyres
 

As of 21-5-24

3. MRF

As of 21-5-24

Nomura’s Take on Tyre Price Hike

1. Nomura believes companies will try to take price hikes but this might be difficult & take some time in segments such as truck-bus, where it expects demand to be weak in near term. 
2. Japanese brokerage company Nomura repeated its cautious attitude on tire industry on Tuesday, citing steep increase in natural rubber costs as another obstacle to sector's margins. As result, shares of tire businesses, including MRF Ltd. & Apollo Tyres, saw 2% decline in trading.
3. firm pointed out that growing material prices & decline in demand could cause margins in industry to normalize more quickly.
4. worldwide natural rubber market has seen significant price spike since February, which, at least momentarily, signals conclusion of protracted era of declining demand.
5. As of March 18, 2024, price of natural rubber on domestic market had increased 23% QoQ to ₹186 per kg. rise in rubber prices internationally has been more marked, rising 66% QoQ to ₹230 per kg, bringing it closer to its previous record observed in early 2011.

What trader could expect?

1. Companies may attempt to pass on some of cost through price increases, but in categories like truck-bus, where demand is expected to be sluggish in near future, this may be challenging & need some time.
2. According to MoneyControl report, traders believe that prices for Indian natural rubber could reach ₹200 per kg in April & May, which would put pressure on tire companies in first quarter of FY24–25.

Conclusion

Since tires account for over 70% of consumption of natural rubber, price increase of this vital raw material would drive up production costs for tire producers, who will then need to take steps to lessen impact.
Tire exports have been further impacted by Red Sea issue, making Indian goods less competitive on international market in face of growing competition from China & other Asian countries in recent months.