A rebound in natural rubber prices has prompted tire manufacturers to replace natural rubber with synthetic products to keep their margins intact. Spot polled prices by Ahmedabad-based National Multi Commodity Exchange (NMCE) showed around a 6 percent increase in the last one week after hitting an over six months low on October 14. NMCE data showed the natural rubber price at Rs 118 a kg on October 14 which shot up to Rs 125 a quintal on October 22. The turnaround in natural rubber price came at a time when synthetic rubber remained stagnant with a downward bias following the trend in crude oil price. Being a derivative of crude oil, synthetic rubber price moves in tandem with crude oil price. Synthetic rubber is currently trading at around a 30-35 percent discount to the natural rubber due to a massive 26 percent fall in crude oil price since the level of $115 a barrel in mid-June.

"Until last week, prices of both synthetic rubber and natural rubber were moving hand-in-hand. It was only last week when natural rubber price started moving up without proportionate increase in synthetic rubber prices. If the trend continues, we may think of replacement of natural rubber with synthetic rubber," said a senior official with one of the largest tire manufacturing companies in India. In India, the consumption ratio between natural rubber and synthetic rubber stands at nearly 73:27 against the world ratio of 44:56, which shows over dependence on natural rubber. With the proposed change in the consumption pattern, the blend percentage may favor synthetic rubber.

"Yes, replacement of natural rubber with synthetic rubber is possible up to a point as it adds to the cost advantage. Hence, the tire industry may think of using more synthetic rubber if the natural rubber price continues upward move," said M.F. Vohra, chairman and managing director of Zenith Industrial Rubber Products. Styrene butadiene rubber is trading currently at $1,850 a metric ton against $1,650 a metric ton of ribbed smoked sheet (RSS), a rubber raw material. Prices of these commodities have moved in tandem with crude oil price. Non-oil grade SBR average price rose from around $1,925 a metric ton cif China in early July to around $2,050 a metric ton mid-August, before falling to $1,850 a metric ton now. A recent Capital Market study shows raw material accounting for 65-70 of tyre industry's turnover. Tyre manufacturers primarily use natural rubber, synthetic rubber, carbon black and rubber chemical as raw materials.

"However, the use of synthetic rubber can be capped with the quality of products. If you want more tensile and strength in tire, synthetic rubber can be a better choice," said Vohra. Tire sector accounts of Rs 35,000 crore of rubber industry's total turnover of Rs 60,000 crore in the financial year 2012-13, while non-tire comprises the remaining. B.K. Bansal, senior vice president (Finance) of Balkrishna Tyres, however, does not favor replacement of natural rubber with synthetic rubber in tire production. "Replacement (of natural rubber with synthetic rubber) comes at the cost of quality which most reputed companies would not like to do," said Bansal. Data compiled by the Rubber Board showed India's natural rubber production at 60,000 metric tons in September 2014 as against 80,000 metric tons in September 2013. Meanwhile, consumption of natural rubber increased marginally by 0.6 percent to 85,500 metric tons as against 85,000 metric tons in the comparable month last year. According to industry sources, the deficit of natural rubber for September stood at 25,500 metric tons. India imported 41,848 metric tons of rubber in September. Between April and September 2014, the imports have gone up by 24 percent to 225,625 metric tons against the same period last year.

Source: Business Standard