The Hindu Business Line : Rubber prices poised to peak again

WILL natural rubber prices go through the roof in the coming months, like they did last year? Chances are that the prices might show a repeat performance of last year's levels, industry observers say.

In June last year, rubber prices touched Rs 60 a kg for the benchmark RSS-4 grade. On July 10, RSS-4 grade recorded its highest price - Rs 67.50 - for the year, before coming down.

Such a price rise of the commodity left the consuming sectors such as tyre makers a worried lot, who had to seek the intervention of the Rubber Board. Heavy monsoon rains in Kerala, which produces over 90 per cent of the country's natural rubber and increased consumption were the reasons for the prices to soar.

Now, many in the rubber industry say prices are poised to skyrocket, again.

One of the indicators of such a rise is already visible in the futures market. The National Multi-Commodity Exchange (NMCE) quoted Rs 61.49 a kg for deliveries in July. For June, the price quoted is Rs 60.50, compared with the present price of Rs 55.50 in the spot market.

Another factor is the increasing consumption of tyre companies, who use up 52 per cent of the total natural rubber produced in a year. The tyre industry is expected to grow by eight per cent in 2005-06, as India, poised to grow at 6-6.5 per cent, will produce more goods to be transported across the country.

The non-tyre sector too is likely to grow at about three per cent year-on-year.

This increase in demand for raw material is sure to reflect in prices, says Mr N. Radhakrishnan, President of the Cochin Rubber Merchant Association, as this increase in consumption is unlikely to be matched in rubber production.

Even in the current fiscal, production is likely to be marginally lower than the Rubber Board-projected 7.60 lakh tonnes. So any significant increase in 2005-06 may not happen over the present production, he says.

While this year tyre companies resorted to heavy rubber imports to meet their demand - they imported over 65,000 tonnes against 43,154 tonnes in 2003-04 - such a strategy may not work next year because of the introduction of value added tax (VAT) in India.

The four per cent VAT replaces the existing 12.65 per cent of purchase tax in the domestic market. Tyre industry sources have said if the international price is higher than the domestic rate by over Rs 2.50 a kg, imports will not be economically viable even under the duty-free Advanced License Scheme.

The existing 12.65 per cent purchase tax often made it economical for tyre firms to go for duty-free imports in the past. Such an attraction will go with the advent of VAT as tyre makers would find it viable to buy from domestic market at four per cent VAT.

Prices in other major rubber-producing countries such as Indonesia, Malaysia and Thailand may rule high on account of the prevailing dry spell in the South East Asia that threatens to affect yield.

The tyre industry, although tentatively, has projected an imports of only around 40,000 tonnes for 2005-06. This means that they will be buying more from the domestic market this year.

Since it is unlikely for a drastic drop in oil prices in 2005-06, synthetic rubber prices will rule firm. Butadiene, a petroleum product, goes into the making of synthetic rubber. This will continue to make consumers to turn to natural rubber as seen earlier.

Given these circumstances, rubber growers could well be in for another rich harvest in the coming months, thought for consuming industries, it will be the return of scary days.

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