What US-China Trade Tensions Hold For Indian Tyre Manufacturers?

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Prices of rubber have plunged about 17% in three months. While the domestic price of RSS Grade 4 rubber has seen a drop of 24% during the last one year. The reason for this was the forecast about surplus rubber supply in international markets in 2018. In the past weeks, prices of rubber have dropped due to the intensifying trade war between the US and China over the tariff duties imposed by the former on latter’s products.

The bone of contention between these two countries is the fact that being the largest manufacturer of automobile tyres in the world, China exports over 60% of its production. A large amount of this is exported to the US – the world’s second-largest tyre producer. Of late the US’s automobile tyre exports have seen a dip of about 25% (2016 data).

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As per a recent report from Bloomberg, the proposed US tariff list includes new and retreaded pneumatic tyres and non-radial rubber tyres used in aircraft from China. This gives rise to the question – whether Chinese tyre industry will be able to manoeuvre around these tariffs or it will get caught in this war between the two top tyre exporters? If we have to listen to analysts then the prospects are not so bright as they fear that retaliation from China will exacerbate the scenario and, in turn, the US may include a wider range of products of China in the tariff list.

Any retrenchment in the US imports owing to impractical duty structures will result in loss of revenue and profits of Chinese tyre manufacturers. Earlier in 2015, when the US government imposed punitive tariffs on tyres from China, the result was plummeting of rubber prices as it hit the rubber exports from Southeast Asian countries as a result of collateral damage from tariffs. Moreover, the current state of Chinese tyre industry is not good as it is reeling under pressure from a slowdown in domestic demand and environmental restrictions.

Thus, the fall in the prices of rubber is not surprising. The current tensions between the US and China have surfaced during a time when there is a surplus supply of rubber being expected in the International market this year. In fact, the ever-changing prices of rubber have stabilised since October last year in the international market.

Due to more than expected production, the price of RSS Grade 4-rubber is down about 25% in a year in domestic markets. The slide in rubber prices augurs well for the industry as rubber constitutes two-thirds of production cost. Additionally, this could counterbalance the untoward impact of mounting crude oil prices, another extremely important element in tyre production.

In the domestic market, tyre sales have been zipping and will continue to do well as the demand for vehicles is soaring. It is expected that the demand from OEMs and replacement market segments will stay stable in the next 12 months. This means that strong revenue and the low raw material cost will result in improving profitability for the manufacturers. Thus, the positive growth in the stocks of Apollo Tyres Ltd, JK Tyre and Industries Ltd. And MRF Ltd. is justified. These tyre manufacturers have seen a growth of 15-20% in their stock prices since October 2017 along with substantial growth in the last two quarters.

But the Indian companies must tread cautiously as there could be negative implications for the domestic tyre industry in case of China’s decision to dump surplus produce at cheap prices to clear stock. To a good extent, the recent anti-dumping duty has kept Chinese imports to wreak havoc in the Indian market as they used to be in last few years. As of now, the picture looks bright for the Indian companies which are doing good business due to rising sales and lowering of rubber prices. But industry experts are circumspect that altering the tyre grades may help China to evade the tariff classification.

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